Research points

- writ jurisdiction and renewal of contracts

- arbitrariness in contractual matters by State and writ jurisdiction

The Supreme Court in its recent judgement of 'Uttar Pradesh Power Transmission
Corporation Ltd. v. CG Power and Industrial Solutions Ltd. & Anr.'1 held that the courts can
entertain writ petitions in contractual disputes, despite existence of arbitration clauses. The
Supreme Court enunciated the said point of law in the factual matrix detailed below.

The Supreme Court held that the High Court is not prevented from entertaining a writ petition
despite existence of an arbitration agreement. The judgement went on to record that it is a
well settled proposition of law that the availability of an alternate remedy does not prohibit
the High Court from entertaining a writ petition, particularly in the following contingencies:

i. Where the writ petition seeks enforcement of a fundamental right

ii. Where there is failure of principles of natural justice

iii. Where the impugned orders are wholly without jurisdiction

iv. Where the vires of an act is under challenge

The Supreme Court placed reliance on a number of precedents2 on the issue of law with
special emphasis on its judgement in Harbanslal Sahnia & Ors. v. Indian Oil Corporation
Ltd.3, wherein the impugned order of Indian Oil Corporation terminating the dealership of the
appellant therein was set aside, while entertaining a challenge to a judgement passed in
exercise of writ jurisdiction by the high court, despite existence of an arbitration clause.

As per its findings on facts of the case at hand, the Supreme Court found that the act of the
Petitioner was in fact in excess of its power, especially in the absence of an assessment or
levy of cess under the Cess Act by the authorities. Thus, the Petitioner could not have taken
recourse to the methods adopted by it.

The Supreme Court recorded that relief under Article 226 of the Constitution can be granted
in contractual disputes. However, given the discretionary nature of writ jurisdiction, it should
not be exercised in matters involving adjudication of disputed questions of fact which may
require detailed analysis of evidence.

Footnotes

1 2021 SCC OnLine SC 383

2 Whirlpool Corporation v. Registrar of Trade Marks, Mumbai & Ors. [AIR 1999 SC 22];
Pimpri Chinchwad Municipal Corporation & Ors. v. Gayatri Construction Company &
Ors. [(2008) 8 SCC 172]

3 (2003) 2 SCC 107

As with all debates, this one has two sides. On the one hand,  High Courts undoubtedly
possess extraordinary powers to issue prerogative writs under Article 226 of the Constitution
of India,  subject to  judicially crafted and self-imposed limitations, one of them, especially 
in the context of commercial matters, being the existence of an efficacious alternative remedy
such as arbitration. On the other hand, it is universally acknowledged that existence of an
alternative remedy cannot be an absolute bar to exercise of writ jurisdiction by High Courts.

  The UPPTCL case

A certain framework agreement was entered into between UPPTCL (employer) and CG
Power and Industrial Solutions Limited (contractor) for construction of 765/400 KV
substations at Unnao, Uttar Pradesh. In the framework agreement, the scope of the
construction work was divided into four contracts. The first contract was in the nature of a
supply contract, while the other three contracts pertained to civil works. After the contractor
completed the supply work as per the supply contract, it was found, on an audit objection,
that UPPTCL had failed to deduct labour cess from the bills of the contractor, under the
Building and Other Construction Workers’ (Regulation of Employment and Conditions of
Service) Act, 1996 (BOCW Act). Consequently, a demand was raised by UPPTCL upon the
contractor. 

The contractor filed a writ petition in the Allahabad High Court and challenged the demand,
stating that the first contract was a pure supply contract and would not attract levy of labour
cess under the BOCW Act. The employer/UPPTCL did not raise the point of existence of an
arbitration clause in the framework agreement before the High Court.

The High Court set aside the demand in exercise of its writ jurisdiction.

What the Supreme Court held

While affirming the judgment of the High Court on merits, the Supreme Court found that
although there was an arbitration clause in the framework agreement, the employer did not
raise an objection in that regard and the existence of an arbitration clause did not debar the
High Court from entertaining the writ petition.

The Supreme Court further reiterated that availability of an alternative remedy, such as
arbitration, would not prohibit the High Courts from entertaining a writ petition in an
appropriate case. The Court referred, amongst others, to the judgments in Whirlpool
Corpn. v. Registrar of Trade Marks[2] and Harbanslal Sahnia v. Indian Oil Corpn. Ltd.
[3] and noted that, notwithstanding the availability of such an alternative remedy, a writ
petition would nevertheless be maintainable under certain circumstances. The Supreme
Court, however, struck a note of caution that since writ jurisdiction under Article 226 is
discretionary in nature, courts should refrain from entertaining a writ petition which involves
adjudication of disputed questions of fact and analysis of evidence of witnesses.

It appears that the Court’s attention was not drawn to the fact that over the years, the
correctness of the decision in Harbanslal Sahnia[4] has been doubted in subsequent
decisions, as discussed in Part B below.

The decisions in Whirlpool Corporation and Harbanslal Sahnia

In Whirlpool Corpn. v. Registrar of Trade Marks[5], the Bombay High Court dismissed a

writ petition challenging a show cause notice for cancellation of the certificate of renewal for
a trademark issued by the Registrar of Trade Marks. The issue for consideration was whether
a writ could be maintained in view of existence of an alternative remedy before the Registrar
under the Trade Marks Act, 1940.  In this case, the dispute neither arose out of a contract nor
was otherwise agreed by the parties as being referable to arbitration.

A two-Judge Bench of the Supreme Court held that the power of the High Courts to issue
prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited
by any other provision of the Constitution and therefore, the High Courts, having regard to
the facts of the case, have the discretion to entertain or not to entertain a writ petition. The
Supreme Court stated that the High Courts have imposed upon themselves certain
restrictions, including existence of an effective and efficacious alternative remedy. The
Supreme Court further went on to hold that presence of an alternative remedy would not
operate as a bar in at least three contingencies, namely (i) where the writ petition is filed for
enforcement of any of the fundamental rights; or (ii) where there is a violation of the
principle of natural justice; or (iii) where the order or proceedings are wholly without
jurisdiction or the vires of an Act is challenged.

This judgment was followed by a two-Judge Bench of the Supreme Court in Harbanslal
Sahnia v. Indian Oil Corpn. Ltd.[6] where the Supreme Court reiterated that the rule of
exclusion of writ jurisdiction, in view of availability of alternative remedy, is a rule of
discretion and not one of compulsion and the court may interfere if it comes to the conclusion
that the case falls within one of the contingencies enunciated in Whirlpool Corpn.[7].

The dispute in Harbanslal Sahnia[8] pertained to termination of a petroleum dealership

agreement by the respondent Corporation. Here, a writ petition filed by the aggrieved dealer
challenging the termination action was dismissed by the High Court, having regard to the
contractual relationship between the parties and existence of an arbitration clause in the
dealership agreement. The Supreme Court, however, overruled the judgment of the High
Court, after concluding that the termination was vitiated by non-compliance with certain
government orders.

At this stage, it would be useful to look at certain decisions of the Supreme Court prior to the
judgment in Harbanslal Sahnia[9].

In Titagarh Paper Mills Ltd. v. Orissa SEB[10], a three-Judge Bench of the Supreme Court
upheld a Orissa High Court order dismissing a writ petition on the basis that the issue(s) in
question pertained to disputes which were arbitrable under a contract.  In this case, the levy of
a coal surcharge on the consumers of the Electricity Board concerned was challenged before
the High Court. The High Court dismissed the petition on a preliminary ground that a specific
remedy of arbitration was available to the parties. The Supreme Court upheld the High
Court’s order and relegated the parties to arbitration, after finding that the claims relating to
levy of coal surcharge would be covered by the arbitration agreement.

The approach in Titagarh Paper Mills Ltd.[11] was followed in several later judgments of the
Supreme Court, such as State of U.P. v. Bridge & Roof Co. (India) Ltd.[12], Kerala
SEB v. Kurien E. Kalathil[13] and State of Gujarat v. Meghji Pethraj Shah Charitable
Trust[14].  In these judgments, the Supreme Court opined that factual disputes or disputes
arising out of contractual terms or disputes pertaining to termination of the contract, without
adherence to principles of natural justice, cannot be entertained in a writ petition and the
suitable forum for adjudication may be a civil court or arbitration.     

Correctness of Harbanslal Sahnia doubted

Since the aforesaid prior judgments were not considered by the Supreme Court in Harbanslal
Sahnia[15], its correctness was doubted in subsequent decisions of the Supreme Court.
In Sanjana M. Wig v. Hindustan Petroleum Corpn. Ltd.[16] a two-Judge Bench of the
Supreme Court noted that the Benches which decided Harbanslal Sahnia[17] and Whirlpool
Corpn.[18] did not notice the prior decision in Titagarh Paper Mills Ltd.[19].  Nevertheless,
the Court went on to hold that since the discretionary writ jurisdiction of the High Court will
be determined on the facts and circumstances of each case, no hard and fast rule could be laid
down. The Court held that a writ petition may be maintainable in situations where the
impugned action is de hors the terms of the contract and also beyond the ambit and scope of
the domestic forum created therefor; the Court qualified its finding by stating that such a case
has to be indubitably pleaded.
 

Another two-Judge Bench of the Supreme Court opined in Ankur Filling Station v. Hindustan
Petroleum Corpn. Ltd.[20] that the decision in Harbanslal Sahnia[21] requires
reconsideration by a larger Bench. However, this issue was not considered in detail by the
larger Bench in its final order[22], which focused on whether an arbitrator would have the
power to order restoration of a licence. The three-Judge Bench went on to hold in the final
order that there may not be an absolute bar for the arbitrator to order such restoration based
on the facts and circumstances of the case and ultimately permitted the aggrieved party to
invoke the arbitration clause. The Court stated that the larger question of law pertaining to
powers of the arbitrator to grant appropriate relief could only be answered by a larger Bench
of five Judges.

Conclusion

 In view of the above situation, a writ could credibly be maintained in a contractual matter in
the following alternative scenarios, despite existence of an arbitration clause:

(i) the lis involves a public law character[23] or requires a judicial determination in rem[24];

(ii) the alternate forum chosen by the parties would not be in a position to grant appropriate
relief[25];

(iii) a statutory contract is in question[26] or the action of a State or its instrumentality is

demonstrably arbitrary, unreasonable[27] or violative of the fundamental rights of a party;
[28]

(iv) the matter does not relate only to the interpretation of a contract which is within the
domain of an arbitrator[29].

An authoritative pronouncement by a larger Bench of the Supreme Court on this issue would
provide much needed clarity to litigants and practising lawyers alike.

Writ petitions are filed under Article 32 or 226 of Constitution of India against the State in
violation of any of the fundamental rights as given in Part III of the Constitution. Until and
unless no fundamental right is violated, one cannot seek remedy through writ petitions.
Therefore, it is accordingly argued that the rights arising out of a statute or out of a contract
cannot be a fundamental right itself[vii] and hence no writ petition lies for the same.

Generally, it is understood that every time when there is a breach of contract or violation of
terms and conditions of a contract by the State or Government, the fundamental rights of the
other party are violated or the contract is arbitrary in nature. Whereas, it is always not the
case. A mere breach of contract or non-payment of dues, without any other ground, does not
invoke jurisdiction under Article 226.[viii] Not necessarily, every time when there is a breach
of contract by the State, it is in violation of fundamental rights of the other party or against
the principles of natural justice.

Findings of the Court

The Hon'ble Supreme Court observed that recourse to the jurisdiction under Article 226 of
the Constitution is not excluded altogether in a contractual matter. The Hon'ble Supreme
Court referred to its judgment in ABL International Ltd. v. Export Credit Guarantee
Corporation of India.3 In ABL International, reliance was placed upon the long line of
precedents4 that held that writs under Article 226 are maintainable for asserting contractual
rights against the state, or its instrumentalities, as defined under Article 12 of the
Constitution.

The Hon'ble Supreme Court then referred to three-Judge Bench decisions in State of U.P. v.
Sudhir Kumar5 and Popatrao Vynkatrao Patil v. State of Maharashtra6 where the exposition
in ABL International was adopted.

The Hon'ble Supreme Court pointed out that the decision in ABL International, leaves a
cautionary note that where the plenary powers under Article 226 are sought to be invoked,
they must be used with circumspection when the contract has provided other remedies.
Nevertheless, as a statement of principle, the jurisdiction under Article 226 is not excluded
merely because a matter is contractual in nature.

II. On whether the presence of an arbitration clause within a contract between a state
instrumentality and a private party would bar the remedies under the writ jurisdiction
of Article 226?

The Hon'ble Supreme Court held that the presence of an arbitration clause within a contract
between a state instrumentality and a private entity could not act as an absolute bar to
availing remedies under Article 226 of the Constitution. It was observed that where a state
instrumentality violates its constitutional mandate under Article 14 to act fairly and
reasonably, relief under the plenary powers of Article 226 of the Constitution would be
available.7 The writ jurisdiction under Article 226 was held to be a valuable constitutional
safeguard against an arbitrary exercise of state power or misuse of authority. Thus, the
Hon'ble Supreme Court held that "the presence of an arbitration clause does not oust the
jurisdiction under Article 226 in all cases, though it still needs to be decided on a case-to-case
basis whether recourse to a public law remedy can justifiably be invoked." To determine
whether the invocation of writ jurisdiction is justified or not, the court must undoubtedly
eschew the disputed set of facts that would demand a further perusal of evidence in a trial.

In view of the observations made by the Hon'ble Supreme Court, the appeals stood disposed
of whereby Unitech was held to be entitled to a refund of INR 165 crores together with
interest commencing from the respective dates of payment, computed in accordance with the
provisions of the Development Agreement except for compounding.

Comments

The present case is a classic example of the interplay between the public policy and the
arbitration regime of India. On one end, it is vital to recognize a litigant's right to invoke writ
jurisdiction under Article 226 against the state or its instrumentalities, which violate the
constitutional mandate to act reasonably under Article 14 of the Constitution. On the other
end, it is also essential to preserve the norm of limited interference from the courts in the
arbitral process. In the instant matter, the Hon'ble Supreme Court has been successful in
achieving both the goals mentioned above.

The Hon'ble Supreme Court has very carefully opined in the instant case that the plenary
power under Article 226 must be used with circumspection where the litigant can avail other
remedies. The Hon'ble Supreme Court further clarified that it has to be decided on a case-to-
case basis whether the recourse to a public law remedy can be justifiably invoked. In a recent
decision of the Hon'ble Supreme Court in Bhaven Construction through Authorised Signatory
Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd and
Another8, it was held that the High Court would not invoke its writ jurisdiction to interject
with the arbitral process, barring rare circumstances. Therefore, in our opinion, unless a
justifiable ground is provided for invoking writ jurisdiction, the courts would choose to not
interfere with the arbitral process or the dispute resolution mechanism elected by parties to a
dispute. Hence, the judgment has rightfully performed a balancing act by holding that the
presence of an arbitration clause within a contract between a state instrumentality and a
private party shall not absolutely bar the aggrieved party from seeking recourse under Article
226 of the Constitution.

In Tata Cellular v. Union of India, MANU/SC/0002/1996 : (1994) 6 SCC 651, this Court
(SC) has held that: "The duty of the Court is to confine itself to the question of legality. Its
concern should be:

1. Whether a decision-making authority exceeded its powers,

2. committed an error of law,

3. committed a breach of the rules of natural justice,

4. reached a decision which no reasonable tribunal would have reached or,

5. abused its powers.

Therefore, it is not for the Court to determine whether a particular policy or particular
decision taken in the fulfilment of that policy is fair. It is only concerned with the manner in
which those decisions have been taken. The extent of the duty to act fairly will vary from
case to case. Shortly put, the grounds upon which an administrative action is subject to
control by judicial review can be classified as under.

(i) Illegality: This means the decision-maker must understand correctly the law that
regulates his decision-making power and must give effect to it;
(ii) Irrationality, namely, Wednesbury unreasonableness.
(iii) Procedural impropriety. The above are only the broad grounds but it does not rule
out addition of further grounds in course of time."

Madras High Court

D.Raja vs The Chief General Manager on 27 July, 2012

26. In support of this contention, learned counsel for the petitioner relied upon the judgment
of the Hon'ble Supreme Court in ABL International Ltd and another vs. Export Credit
Guarantee Corporation of India Ltd. and others, (2004) 3 SCC 553, wherein the Hon'ble
Supreme Court has been pleased to lay down as under:

"52. On the basis of the above conclusion of ours, the question still remains why should we
grant the reliefs sought for by the appellants in a writ petition when a suitable efficacious
alternate remedy is available by way of a suit. The answer to this question, in our opinion,
lies squarely in the decision of this Court in the case of Shrilekha Vidyarthi12 wherein this
Court held: (SCC pp. 235-37, paras 20-22 & 24) The requirement of Article 14 should extend
even in the sphere of contractual matters for regulating the conduct of the State activity.
Applicability of Article 14 to all executive actions of the State being settled and for the same
reason its applicability at the threshold to the making of a contract in exercise of the
executive power being beyond dispute, the State cannot thereafter cast off its personality and
exercise unbridled power unfettered by the requirements of Article 14 in the sphere of
contractual matters and claim to be governed therein only by private law principles applicable
to private individuals whose rights flow only from the terms of the contract without anything
more. The personality of the State, requiring regulation of its conduct in all spheres by
requirements of Article 14, does not undergo such a radical change after the making of a
contract merely because some contractual rights accrue to the other party in addition. It is not
as if the requirements of Article 14 and contractual obligations are alien concepts, which
cannot coexist. The Constitution does not envisage or permit unfairness or unreasonableness
in State actions in any sphere of its activity contrary to the professed ideals in the preamble.
Therefore, total exclusion of Article 14  non-arbitrariness which is basic to rule of law from
State actions in contractual field is not justified. This is more so when the modern trend is
also to examine the unreasonableness of a term in such contracts where the bargaining power
is unequal so that these are not negotiated contracts but standard form contracts between
unequals.

Unlike the private parties the State while exercising its powers and discharging its functions,
acts indubitably, as is expected of it, for public good and in public interest. The impact of
every State action is also on public interest. It is really the nature of its personality as State
which is significant and must characterize all its actions, in whatever field, and not the nature
of function, contractual or otherwise, which is decisive of the nature of scrutiny permitted for
examining the validity of its act. The requirement of Article 14 being the duty to act fairly,
justly and reasonably, there is nothing which militates against the concept of requiring the
State always to so act, even in contractual matters. This factor alone is sufficient to import at
least the minimal requirements of public law obligations and impress with this character the
contracts made by the State or its instrumentality. It is a different matter that the scope of
judicial review in respect of disputes falling within the domain of contractual obligations may
be more limited and in doubtful cases the parties may be relegated to adjudication of their
rights by resort to remedies provided for adjudication of purely contractual disputes.
However, to the extent, challenge is made on the ground of violation of Article 14 by alleging
that the impugned act is arbitrary, unfair or unreasonable, the fact that the dispute also falls
within the domain of contractual obligations would not relieve the State of its obligation to
comply with the basic requirements of Article 14. To this extent, the obligation is of a public
character invariably in every case irrespective of there being any other right or obligation in
addition thereto. An additional contractual obligation cannot divest the claimant of the
guarantee under Article 14 of non-arbitrariness at the hands of the State in any of its actions.

53. From the above, it is clear that when an instrumentality of the State acts contrary to public
good and public interest, unfairly, unjustly and unreasonably, in its contractual, constitutional
or statutory obligations, it really acts contrary to the constitutional guarantee found in Article
14 of the Constitution. Thus if we apply the above principle of applicability of Article 14 to
the facts of this case, then we notice that the first respondent being an instrumentality of the
State and a monopoly body had to be approached by the appellants by compulsion to cover its
export risk. The policy of insurance covering the risk of the appellants was issued by the first
respondent after seeking all required information and after receiving huge sums of money as
premium exceeding Rs 16 lakhs. On facts we have found that the terms of the policy do not
give room to any ambiguity as to the risk covered by the first respondent. We are also of the
considered opinion that the liability of the first respondent under the policy arose when the
default of the exporter occurred and thereafter when the Kazakhstan Government failed to
fulfil its guarantee. There is no allegation that the contracts in question were obtained either
by fraud or by misrepresentation. In such factual situation, we are of the opinion, the facts of
this case do not and should not inhibit the High Court or this Court from granting the relief
sought for by the petitioner."

27. Learned counsel for the petitioner also placed reliance on the judgment of the Hon'ble
Supreme Court in Harjinder Singh vs. Punjab State Warehousing Corporation, (2010) 3 SCC
192, wherein the Hon'ble Supreme Court observed as under:

"30. Of late, there has been a visible shift in the courts' approach in dealing with the cases
involving the interpretation of social welfare legislations. The attractive mantras of
globalisation and liberalisation are fast becoming the raison d'jtre of the judicial process and
an impression has been created that the constitutional courts are no longer sympathetic
towards the plight of industrial and unorganised workers. In large number of cases like the
present one, relief has been denied to the employees falling in the category of workmen, who
are illegally retrenched from service by creating by-lanes and side-lanes in the jurisprudence
developed by this Court in three decades. The stock plea raised by the public employer in
such cases is that the initial employment/engagement of the workman/employee was contrary
to some or the other statute or that reinstatement of the workman will put unbearable burden
on the financial health of the establishment. The courts have readily accepted such plea
unmindful of the accountability of the wrong doer and indirectly punished the tiny
beneficiary of the wrong ignoring the fact that he may have continued in the employment for
years together and that micro wages earned by him may be the only source of his livelihood."
28. By relying upon these judgments, the learned counsel for the petitioner vehemently
contended, that it is the duty of the Court to interpret the social welfare legislations to protect
the rights of the employee and to interpret the provisions of contract of petitioner in a
manner, that in view of the performance of the second year, he was entitled to renewal of
contract automatically. The impugned orders therefore are outcome of misinterpretation of
the contract and rules.

29. Finally, reliance was placed on the judgment of the Hon'ble Supreme Court in Western
Indian Batch Company Ltd. and Workmen, 1973 II LLJ 403, to contend that terms of the
agreement cannot be enforced against the employee, as they are not equally placed to enter
into contract. The learned counsel for the petitioner, therefore, contended, that discharge of
petitioner is totally arbitrary, therefore, cannot be sustained in law, as the respondents have
failed to apply their mind to the terms of the contract stipulating extension of period, which
would have entitled the petitioner to regularization under the subsequent circulars, issued by
the respondents.