Are The Non-Negotiable Principles Of The Rule Of Law Alien To The Interpretation Of Contractual Clauses? Supreme Court Clarifies

In a recent judgement, ABS Marine Services vs. Andaman and Nicobar Administration1, the Supreme Court, inter alia, held that allowing a party to unilaterally judge a dispute violates the Rule of Law and the maxim ubi jus ibi remedium. In this case, the Apex Court upheld the arbitral award wherein the Arbitrator held that a clause barring legal remedies to a party is void for contravening Section 28 of the Indian Contract Act, 1872.  

Factual Background 

ABS Marine Services (” the Appellant”) entered into a Manning Agreement with the Andaman and Nicobar Administration (“the Respondent”) to provide ship officers for 17 vessels. 

The vessel M.V. Long Island drifted in rough seas, struck a submerged rock, and was damaged. The Respondent issued a Show Cause Notice to the Appellant in reply to which, the Appellant denied its liability on 12.03.2013. The Respondent unilaterally deducted Rs. 2,87,84,305/- from the Appellant's pending bills towards penalty for the grounding of the vessel.  

The Conflicting Clauses 

The relevant Clauses on which this dispute hinged were a) Clause 3.22, the arbitration clause, which was broadly worded to refer to any unresolved dispute between the parties to a sole arbitrator and b) Clause 3.20, the default clause, that prescribed penalties for wilful acts of omission or neglect causing financial loss, and crucially provided that the Administration's decision in such matters would be 'final and binding,' challengeable neither in any court of law nor through arbitration. 

Disputes arose between the parties, and the disputes were referred to the Arbitrator. The Arbitrator held that Clause 3.20 was void to the extent it barred all legal remedies, contravening Section 28 of the Indian Contract Act, 1872. The Respondent filed an application under Section 34 of the Arbitration and Conciliation, 1996 (“A&C”) Act to set aside the award. However, the District Judge upheld the award under Section 34 of the A&C Act. The Respondent challenged the findings of the District Court under Section 37 before the Calcutta High Court. The Calcutta High Court, under Section 37 of the A&C Act, set aside the award, holding that in view of sub-para 4 of Clause 3.20 of the agreement, the dispute was not within the jurisdiction of the arbitrator. 

Legal Issues 

The Supreme Court framed the core question as to whether the High Court was correct in allowing the Respondent's Section 37 appeal under the A&C Act. Other subsidiary issues discussed by the Apex Court included whether a clause barring recourse to courts and arbitration was consistent with the Rule of Law and Section 28 of the Indian Contract Act, 1872. 

Supreme Court’s decision 

The Supreme Court allowed the appeal and restored the arbitral award, holding that firstly, one party cannot be the judge in its own cause on a disputed question of breach, and that Clause 3.20's finality operates only when the wilful action or negligence by the Appellant is not disputed, in which case the Administration may quantify and recover the loss. When “wilful act or omission or neglect” is disputed, such question shall be within the ambit of the arbitration Clause (Clause 3.22) 

Secondly, the Respondent’s contention that under Clause 3.20 ‘the administration's decision would be final and neither a Court of law nor an Arbitrator could examine the correctness’ goes against the legal maxim ubi jus ibi remedium. A clause ousting courts and arbitration produces an impermissible vacuum in legal remedies. The Supreme Court held that the arbitrator had full jurisdiction and committed no error in entertaining the dispute.  

Conclusion 

The Supreme Court in the present case, while holding that the principles of the Rule of Law are not alien to the interpretation of contractual clauses, cautioned that parties ought to refrain from incorporating clauses that foreclose legal remedies qua initiation of dispute resolution since such clauses would be in contravention to section 28 of the Indian Contract Act, 1872 which states that the agreements in restraint of legal proceedings are void. Furthermore, the Supreme Court has clearly indicated that once a dispute is deemed arbitrable, the facts fall within the domain of arbitration. The Supreme Court once again affirmed that one party cannot be the final judge of its own cause and clarified that no construction or interpretation of a contractual clause can result in a vacuum of legal remedies. Therefore, in light of this Supreme Court judgement, it is essential to revisit those contractual clauses that either bar the legal remedies available to the parties under the law or suggest that the decision of one party will be final and binding on the other party. 

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