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

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Arbitration Clause In Contract Between State Instrumentality & Private Party Does Not Bar The Writ Jurisdiction Under Article 226: Supreme Court
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The Supreme Court on Wednesday observed that presence of an arbitration clause in a contract between a state instrumentality and a private party does not bar the writ jurisdiction of High Court under Article 226 of the Constitution.

In the instant case, Division Bench of Telangana High Court had upheld the order passed by Single Judge on the liability of Telangana State Industrial Infrastructure Corporation (TSIIIC) 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. So, TSIIC mainly contended that the High Court should not have entertained the writ under Article 226 Constitution as it was a purely contractual dispute that also contains an arbitration clause.

The bench comprising Justices DY Chandrachud and Justice MR Shah observed that public law remedies are available to enforce legal rights at stated:

“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 Top Court allowed the appeal filed by Unitech and set aside the direction of the Division Bench of the High Court which stated that interest was only payable from 14.10.2015.

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