Presence Of Arbitration Clause In Contract Between State Instrumentality & Private Party Does Not Oust Writ Jurisdiction Under Article 226: Supreme Court

The Supreme Court observed that presence of an arbitration clause within a contract between a state instrumentality and a private party is not an absolute bar to availing remedies under Article 226 of the Constitution.

The bench comprising Justices DY Chandrachud and MR Shah observed that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract.

In this case, the Division Bench of the Telangana High Court had upheld the order of the Single Judge on the liability of Telangana State Industrial Infrastructure Corporation to refund an amount of Rs 165 crores to Unitech (Case pertains to a contractual dispute between TSIIC and Unitech). This order was passed while allowing a writ petition filed by Unitech.  Modifying the single bench order, the Division Bench confined the liability to pay interest only with effect from 14 October 2015. 

TSIIC approached the Apex Court mainly contending that the High Court ought not to have entertained a writ petition under Article 226 of the Constitution "in a pure contractual dispute" which also contains an arbitration agreement.

While addressing this contention, the bench observed that the public law remedy is available for enforcing legal rights subject to well-settled parameters. The court said:

Therefore, while exercising its jurisdiction under Article 226, the Court is entitled to enquire into whether the action of the State or its instrumentalities is arbitrary or unfair and in consequence, in violation of Article 14. The jurisdiction under Article 226 is a valuable constitutional safeguard against an arbitrary exercise of state power or a misuse of authority. In determining as to whether the jurisdiction should be exercised in a contractual dispute, the Court must, undoubtedly eschew, disputed questions of fact which would depend upon an evidentiary determination requiring a trial. But equally, it is well-settled that the jurisdiction under Article 226 cannot be ousted only on the basis that the dispute pertains to the contractual arena. This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract. Similarly, the presence of an arbitration clause does oust the jurisdiction under Article 226 in all cases though, it still needs to be decided from case to case as to whether recourse to a public law remedy can justifiably be invoked. The jurisdiction under Article 226 was rightly invoked by the Single Judge and the Division Bench of the Andhra Pradesh in this case, when the foundational representation of the contract has failed. TSIIC, a state instrumentality, has not just reneged on its contractual obligation, but hoarded the refund of the principal and interest on the consideration that was paid by Unitech over a decade ago. It does not dispute the entitlement of Unitech to the refund of its principal.

The court added that even in the domain of contract, State and its instrumentalities cannot claim an exemption from the public law duty to act fairly.

The State and its instrumentalities are duty bound to act fairly under Article 14 of the Constitution. They cannot, even in the domain of contract, claim an exemption from the public law duty to act fairly.14 The State and its instrumentalities do not shed either their character or their obligation to act fairly in their dealings with private parties in the realm of contract. Investors who respond to the representations held out by the State while investing in public projects are legitimately entitled to assert that the representations must be fulfilled and to enforce compliance with duties which have been contractually assumed.

The court, allowing the appeal filed by Unitech, also set aside the the direction of the Division Bench of the High Court which confined the liability to pay interest only with effect from 14 October 2015.

Case: UNITECH Limited vs. Telangana State Industrial Infrastructure Corporation [Civil Appeal No. 317 of 2021]

Coram: Justices DY Chandrachud and MR Shah

Counsel: Sr.Adv C S Vaidyanathan, Adv Anuroop Chakravarti,

Citation: LL 2021 SC 92

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