State or Instrumentalities not exempted from Jurisdiction Under Article 226, merely because there is an arbitration clause in the contract: SC

In a recent case, the Supreme Court has observed that presence of an arbitration clause in the contract between the State and a private party is not an absolute bar for availing remedies under Article 226 of the Indian Constitution.

The Division Bench comprising Hon’ble Justice DY Chandrachud and Hon’ble Justice MR Shah further observed that the State and its instrumentalities are not exempt from the duty to act fairly because of their business dealings when they enter into a contract.

Background:-

In the instant case, Division Bench of Telangana High Court upheld the order passed by Single Judge on Telangana State Industrial Infrastructure Corporation’s liability to refund Rs 165 crores to Unitech. However, the Division Bench modified the order and ruled that the interest was payable only from 14.10.2015.

Aggrieved, TSIIC moved the Supreme Court and argued that the High Court should not have entertained the writ under Article 226 as it was a purely contractual dispute that also contained an arbitration clause.

While addressing the contention described above, the Apex Court observed that public law remedies are available to enforce legal rights.

The Bench further observed that while exercising jurisdiction under Article 226 Court can enquire if the action of the State unfair or arbitrary and if it violated Article 14. Jurisdiction under Article 226 was a valuable constitutional safeguard, and if it can be used in a contractual dispute would depend on the facts of the case.

Therefore, just because an arbitration clause is present in the contract, it does not mean jurisdiction under Article 226 cannot be exercised by courts, remarked the Court. While referring to the case at hand, the Bench opined that TSIIC did not just breach the contract and hoarded the principal amount and interest due to Unitech.

Hon’ble also opined that just because there was a contract, the State or its instrumentalities cannot claim exemption from public law and further clarified that State and instrumentalities are duty-bound to act fairly under Article 14 of Constitution.

The Court allowed the appeal by Unitech and set aside the High Court direction, which stated that interest was only payable from 14.10.2015

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