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Presence Of An Arbitration Clause Does Not Oust The Jurisdiction Under Article 226:Supreme Court Reiterates

Presence Of An Arbitration Clause Does Not Oust The Jurisdiction Under Article 226:Supreme Court Reiterates
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In the matter titled Rapid MetroRail Gurgaon Limited v. Haryana Mass Rapid Transport Corporation Limited and Ors[1] ("Instant Matter"), the Hon'ble Supreme Court bench comprising of Justice D.Y. Chandrachud, Justice Sanjiv Khanna, and Justice M.R. Shah delved into the controversy as to whether public law remedy under Article 226 of Constitution of India can be availed in arbitrable...

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In the matter titled Rapid MetroRail Gurgaon Limited v. Haryana Mass Rapid Transport Corporation Limited and Ors[1] ("Instant Matter"), the Hon'ble Supreme Court bench comprising of Justice D.Y. Chandrachud, Justice Sanjiv Khanna, and Justice M.R. Shah delved into the controversy as to whether public law remedy under Article 226 of Constitution of India can be availed in arbitrable matters. This article explores and dissects the intricacies pertaining to the factual pattern and the rationale for the Supreme Court's holding on the issue.

Brief Facts

  • The Instant Matter concerns two Concession Agreements awarded by Haryana Shehri Vikas Pradhikaran ("HSVP") to Rapid MetroRail Gurgaon Limited ("RMGL") and Rapid MetroRail Gurgaon South Limited ("RMSGL") for the purposes of the development of a metro rail links. Subsequently, both RMGL and RMGSL sought to terminate their Concession Agreements given material breaches by HSVP and, accordingly, they issued notices under which the Concession Agreements would stand terminated on the expiry of 90 (ninety) days from the date of delivery of the termination notice. In the aftermath of the termination notices, RMGL and RMGSL claimed that they had ensured compliance with the disinvestment requirements under the Concession Agreements; however, HSVP had failed to comply with such disinvestment requirements. Moreover, HSVP sent out their own termination notices to RMGL and RMGSL for breach of the Concession Agreements directing them to handover the projects to Haryana Mass Road Transport Corporation Limited ("HMRTC").
  • Notably, RMGL and RMGSL formed part of "red" entities within the IL&FS Group which were required to secure approval before transferring or encumbering any assets, and such approval was granted to them in relation to the handover of projects under the Concession Agreement on September 6, 2018. However, on the same date, two Writ Petition under Section 226 of the Constitution of India were instituted before the High Court of Punjab and Haryana ("High Court") by the HSVP and HMRTC against the notice of termination dated June 7, 2019, sent by RMGL and RMGSL. The petitions prayed for an interim direction for the continuance of operation of the projects by RMGL.
  • In the view of sustained negotiations between the parties and with the objective of shielding the immediate interest of the public sector lenders, the High Court vide its order dated September 20, 2019 ("Consent Order") took note of a "consensus" having been reached between senior officers of both the parties. Thereby, the High Court made directions for RMGL and RMGSL to continue operations of the metro lines for 30 (thirty) days, within which period the amount of "debt due" qua the Concession Agreements ascertained under the aegis of the Comptroller and Auditor General of India. Within 30 (thirty) days of such determination, 80% of the debt due would be transferred to the Escrow account as per the terms of the Concession Agreement. Thereafter, any residual disputes amongst the parties ­arising out of the audit report were to be resolved through arbitration. However, in the context of repeated adjournments and disputes regarding the audit conducted, RMGL and RMGSL filed a Special Leave Petition challenging the aforementioned orders of the High Court which was entertained by the Hon'ble Supreme Court.

Decision of Hon'ble Supreme Court

The Supreme Court ventured into the ambit of the writ jurisdiction of the High Court under Article 226 of the Constitution of India particularly, when the dispute is arbitrable. On this issue, reference was made to the apex court's holding in Sanjana M. Wig v. Hindustan Petroleum Corporation Limited[2] which pronounced that a writ petition would be entertained where it encompasses a "public law" character. It was remarked that while the Instant Matter entailed an interplay between the element of public interest on the one hand and the contractual rights of the parties to the Concession Agreement on the other, the issue at heart in the writ petition was the imminent threat that the rapid metro lines would cease to operate upon the expiry of the 90-day notice period preceding the termination. Thereby, the Supreme Court held that the High Court was manifestly dealing with a fundamental issue of public interest, and the exercise of its writ jurisdiction under Article 226 was warranted as non-interference would have led to the disruption of metro lines and the related unfortunate consequences for the general public. Notwithstanding the same, the Supreme Court was of the view that the High Court ought to refuse to entertain disputes which are arbitrable in ordinary circumstances, particularly since the Arbitration and Conciliation Act, 1996 is equipped with the remedies of granting interim directions under Section 9 and Section 17 before the courts and the Arbitral Tribunal, respectively.

On merits, the Supreme Court also engaged in a detailed analysis of the terms of the Concession Agreements and the Escrow Agreement which were in dispute in the Instant Matter, with specific emphasis on what constitutes the term "debt due"; deposit of 80% of debt due, the Consent Order and subsequent modifications. The Court observed that clause (v) of the Consent Order could be interpreted to mean that when the determination of the debt due was made by the audit report, HSVP would deposit 80 per cent of such amount in the Escrow account and the remaining disputes, if any, would be agitated by way of arbitration. The Supreme Court further pronounced that HSPV and HMRTC could not avoid compliance with the directions of the Consent Order of the High Court at this stage by relying on allegations of fake invoices and inflation of costs as allowing HSPV and HMRTC to intercept or delay payment in the presence of an agreement would be plainly unallowable for the following three reasons: Firstly, the requirement to deposit 80 per cent of the debt due is enshrined in Article 24.4. of the Concession Agreement. Secondly, HSPV/HMRTC have voluntarily taken up the obligation to make a payment of 80 per cent of the debt due as per the auditor's report, and they could not be permitted to resile from the same as public bodies. Thirdly, the Escrow Account Agreement had been executed in relation to the Concession Agreement, and it effectuates the funding for projects which have been undertaken by RMGL and RMGSL through the outlay of funds from Canara Bank and Andhra Bank who have a significant stake in the financials concerning the project. Thus, a crucial public interest aspect is sought to be safeguarded by ensuring that the monies committed by banks and financial institutions towards the financing of infrastructure projects are secured to them as under the Concession Agreement.

Analysis

This Hon'ble Supreme Court judgment contains two important affirmations regarding considerations of public interest in commercial disputes. Firstly, the ruling delves into the scope of the writ jurisdiction of the High Court under Article 226 of the Constitution of India in case of a tussle between public interests as juxtaposed against private contractual rights. The Supreme Court propounds that the High Court under Article 226 must ordinarily refrain from entertaining a dispute which is arbitrable in nature considering that the Arbitration and Conciliation Act, 1996 has been well-equipped with a comprehensive framework for granting reliefs and remedies, including interim order by the Court endowed with the jurisdiction and the Arbitral Tribunal. At the same time, a crucial exception was carved out from this rule: where a fundamental issue of public interest is entangled, the High Court would be justified in exercising its writ jurisdiction pursuant to Article 226 as, in such cases, non-interference by the High Court could potentially cause a devastating hit to public interests. In the present case in hand, the public interest was recognised to be the grave inconvenience inflicted on the general public by the stoppage of the rapid metro owing to the termination of the Concession Agreement. The ratio in this judgment rightly echoes the findings in the earlier Supreme Court pronouncements of Sanjana M. Wig v. Hindustan Petroleum Corporation Limited and Bisra Lime Stone Co. Ltd v. Orissa SEB.

[3]

Secondly, while tackling the issue of whether HSPV and HMRTC ought to be allowed to resile from the terms of the Consent Order and the Concession Agreement, including the requirement of depositing 80 per cent of the debt due in the Escrow account, it was notably held that vital public interest necessitates that the sanctity of financing arrangements with financial institutions as regards infrastructure is maintained as the deterioration in loan recovery would not only hurt profitability, but it would inevitably adversely impact the bank's lending capabilities and, thereby, the economy.

For the reasons as mentioned hereinabove, this judgment would serve as a crucial guiding factor for future commercial disputes and construed as silver lining to the lenders.


Ravi Charan Pentapati is a partner and  Sneha Kalia is an Intern at Link Legal. Views are personal.



[1] Civil Appeals No 925-926 of 2021 arising out of Special Leave Petition (C) Nos. 1832-1833 of 2021.

[2] (2005) 8 SCC 242.

[3] (1972) 2 SCC 167


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