Except Matters One May, But Exclude Justice One Cannot: Supreme Court Restores Arbitral Award, Holds State Cannot Be Judge In Its Own Cause On Disputed Breach

"A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach — that question can only be decided by a court or an Arbitral Tribunal", In a ruling of considerable importance to the law of arbitration and government contracts, the Supreme Court of India on March 23, 2026 restored an arbitral award of over Rs. 2.87 crore in favour of a private Manning Agent, holding that a contractual clause purporting to make the State authority's decision final and binding — while simultaneously barring both court proceedings and arbitration — is fundamentally repugnant to the Rule of Law.

A bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan allowed the appeals of M/s ABS Marine Services, set aside the Calcutta High Court's order, and restored the award made by a former Judge of the Supreme Court sitting as sole arbitrator.

The Court was called upon to determine whether Clause 3.20 of the Manning Agreement — which declared the Administration's decision final and binding while expressly barring both court proceedings and arbitration — could operate as an absolute shield against adjudication even when the Manning Agent disputed liability; whether one party to a contract can be the decision-maker on whether the other party has committed a breach; whether a clause creating a complete vacuum in legal remedies is valid in law; and whether the High Court exceeded its jurisdiction under Section 37 of the Arbitration and Conciliation Act in setting aside the award.

Opening the Judgment: Are Principles of Rule of Law Alien to Contract Interpretation?

The Court opened its judgment with a question that set the tone for its entire analysis: "Are the non-negotiable principles of Rule of Law alien to interpretation of contractual clauses, especially when the State and its instrumentalities are parties to the same?" The Court answered with unmistakable clarity: accepting the State's position would amount to answering that question in the affirmative, "which we are certainly not disposed to do."

One Party Cannot Decide the Other Party's Breach

The Court identified the first and most fundamental flaw in the Administration's position. Clause 3.20 declared that when a Manning Agent causes financial loss through wilful action or negligence, the Administration's decision on liability and recovery shall be "final and binding" and "cannot be challenged in any court of law." The Administration argued it was therefore entitled to have made the Rs. 2.87 crore recovery without any adjudication.

The Court rejected this with firmness, relying on two coordinate bench decisions. In State of Karnataka v. Shree Rameshwara Rice Mills, the Supreme Court had held that the power of a State officer to assess damages for breach can operate "only if the breach of conditions is admitted or if no issue is made of it" — and that "a party to the agreement cannot be an arbiter in his own cause." In J.G. Engineers Pvt. Ltd. v. Union of India, the Court had held even more bluntly: "The question whether the other party committed breach cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal."

Applying these authorities, the Court held that Clause 3.20's grant of finality to the Administration's decision can operate only where the Manning Agent does not dispute wilful action or negligence — that is, where liability is admitted and the Administration proceeds to quantify the amount recoverable. Since the appellant squarely disputed liability from the beginning, "the aspect of liability had to be adjudicated."

"Except Matters One May, But Exclude Justice One Cannot"

The second and even more alarming aspect of Clause 3.20, the Court held, was that it barred recourse to both courts of law and to arbitration simultaneously — creating what the Court described as a complete "vacuum in legal remedies." The Court held this to be impermissible on multiple grounds.

Invoking the fundamental legal maxim ubi jus ibi remedium — where there is a right, there is a remedy — the Court held that "no construction shall be placed which would lead to a vacuum in legal remedies." Section 9 of the Code of Civil Procedure preserves civil court jurisdiction unless expressly or impliedly barred. Section 28 of the Indian Contract Act renders void any agreement that absolutely restricts a party from enforcing its rights through the usual legal proceedings. Exception 1 to Section 28 saves arbitration clauses — but does not save clauses that bar arbitration as well.

The Court's formulation of the governing principle was memorable: "Except matters one may, but exclude justice one cannot." Excepting certain categories of disputes from arbitration is a well-recognized contractual device. But removing all access to courts and arbitration simultaneously, the Court held, "harkens back our memory to what we read of the happenings in times when might was right." Quoting at length from Salmond on Jurisprudence, the Court observed that the very foundation of the administration of justice is to provide a civilised substitute for violent self-help — and that every man being "constituted a judge in his own cause" is precisely the condition that the modern state's legal system exists to abolish.

The Court added a sharp direction for the future: "It is high time that clauses of these types are not incorporated in contracts between a private party on the one hand and the State and its instrumentalities on the other, foreclosing even redress through Courts of law."

The Correct Reading of Clause 3.20: Finality Only on Admitted Liability

Having established these two foundational principles, the Court offered its correct interpretation of Clause 3.20. The clause's grant of finality to the Administration's decision, properly understood, applies only in a scenario where the Manning Agent does not dispute the wilful act or negligence — and where the Administration proceeds to quantify the recoverable loss. "It is this decision (in an admitted scenario vis-à-vis liability of the manning agent) on the quantification that is put beyond the realm of adjudication." Even on this narrower reading, the Court expressed "serious reservations" about denying access to courts even for wrongful quantification — but left that question for another day since it did not directly arise.

The Court also held that what qualifies as an "excepted matter" at best under Clause 3.20 is a case where the Manning Agent admits liability and merely wants to contest the quantum fixed by the Administration. That was not the situation here. The appellant had disputed liability from the outset. Accordingly, the Court rejected the respondent's contention that the arbitrator had entered the zone of "excepted matters."

No Grounds to Interfere with the Award

On the merits of the Arbitrator's findings, the Court held that the Arbitrator had correctly construed Clauses 3.20 and 3.22 harmoniously, correctly found that the Manning Agent's duty was limited to recruiting and placing seafarers with the technical agent, and correctly held that the Manning Agent had no on-board operational functions after the seafarers entered employment contracts with the technical agent. These findings being within the domain of the Arbitrator, the High Court had no jurisdiction under Section 37 to interfere. The High Court's reasoning was, the Court found, "seriously flawed."

Date of Decision: March 23, 2026