Arbitration clause does not always oust judicial review; NHAI must act reasonably: Allahabad High Court

The Allahabad High Court recently reiterated that an arbitration clause or claims about disputed questions of fact do not always oust a High Court's power of judicial review over a dispute.

A Bench of Justices Ajit Kumar and Swarupama Chaturvedi made pertinent observations on the issue while setting aside the National Highway Authority of India’s (NHAI) decision to terminate a contract with Tata Projects (Tata) for a widening and upgradation of a 50 km stretch of NH-709A in Uttar Pradesh.

The Court also reminded the NHAI that it was expected to behave reasonably when it came to contracts including projects of public interest and importance. 

"The National Highway Authority is state within the meaning of of Article 12 of the Constitution and enters contract with private body for construction of national highway, a project of public interest and importance and hence it was expected to behave reasonably in the matter of such contract," the judgment said.

The Court cannot shirk away from interfering in such a matter when NHAI, being a State functionary, is found to have acted unreasonably.

“Constructing the national highway involves expenditure out of the state exchequer where the public money lies. Tax-payer contribution is there …The act of a party which is State under Article 12 in this case is found to be arbitrary one against affect work of public importance and so this Court will not shirk away from its responsibility in arresting any miscarriage of justice in larger public interest,” it said. 

In the present case, the Court found that NHAI had acted arbitrarily in terminating the contract with Tata mid-project.

One of the legal questions before the Court was whether it should interfere in the matter or whether the parties should be left to arbitrate the dispute since the agreement between NHAI and Tata included an arbitration clause. 

This aspect was tied to whether there were disputed questions of facts involved in such a matter, in which case High Courts ordinarily refrain from interfering and relegate the parties to arbitration. 

The Court, however, found that the NHAI’s own documents indicated that it had acted arbitrarily by not handing over all of the land on which the project was to be executed, which delayed the execution of the work undertaken by Tata. 

The Court rejected NHAI’s claim that over 90 per cent of the land had been handed over. 

“It clearly comes to be established that Authority’s Engineer reported to the authority itself (NHAI) that Handover Memorandum though referred to handing over more than 90% of the land but as a matter of fact possession of this much of land was never handed over,” it noted. 

Where such documentary material is sufficient to address any dispute on facts and the challenge is to arbitrary State actions, the High Court effectively held that it can decide the matter.

Unless there is a complex factual issue that requires more detailed hearings and pleadings on facts, the High Court said that it will not shirk away from discharging its judicial review powers. This is particularly when there is sufficient material otherwise available on record to settle the disputed facts, the Court noted, relying on various caselaws.

“The (Supreme) Court in the case of A. P. Electrical Equipment (supra) has, therefore, asserted that mere existence of disputed question of fact by itself, does not take away the jurisdiction of this Court in granting appropriate relief to the petitioner … It has been rightly observed (in the Supreme Court’s ruling in MP Power Management v. Sky Power) that disputed question of fact cannot be made a smokescreen to guillotine a genuine claim raised in the writ petition,” the High Court's July 8 ruling said. 

The Court proceeded to allow the petition filed by Tata seeking the quashing of NHAI’s termination of its contract for the road widening and upgradation project. 

It found that since NHAI had not discharged its obligations under the agreement, it was not justified in insisting that Tata complete the work within an extended but short timeline. 

The Court also noted that the notice issued to Tata in December 2024 proposing the termination of the contract and a January 2025 notice terminating it were verbatim, indicating that there was no application of mind on NHAI’s part when the contract was finally terminated. 

The Court issued directions for NHAI and Tata to work together to find out how the pending work can be executed within a 14-month schedule within which Tata indicated it could finish work. 

“Delay in construction of national highway as a project, if caused due to reasons for the negligence and carelessness and arbitrariness on the part of the State as one of the parties of the contract, the Court is certainly justified lift the corporate veil to understand the exact reasons for such actions," the Court added.

Tata was represented by advocates Varad Nath, Shri Venkatesh (Founding Partner), along with Suhael Buttan (Partner) and Vineet Kumar (Senior Associate) of SKV Law Offices.

Additional Solicitor General of India Aushim Luthra and advocates Pragya Pandey and Pranjal Mehrotra represented the Union of India and NHAI.

[Read Judgment]