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Solaris Chem Tech Industries Ltd vs Assistant Executive Engineer, Karnataka Urban Water Supply and Drainage Board

SLP (C) · 2023 INSC 916Decided 10 Oct 2023
SLP (C) No. 21920 of 2018
Dr Dhananjaya Y Chandrachud · J.B. Pardiwala · Manoj Misra

Background

Solaris Chem Tech ran a caustic soda factory supplied with water by the Karnataka Urban Water Supply and Drainage Board under agreements fixing tariffs. In 2014 the Board issued notices demanding over Rs 8.22 crore in back-dated tariff revisions. The company challenged these notices in a writ petition, but the High Court (Single Judge and then Division Bench) refused to examine the challenge on merits, holding that Clause 11 of the water-supply agreement required the dispute to first go to the Board's own Chief Engineer for a "final and binding" decision, effectively treating it like an arbitration clause.

Decision Breakdown

The Supreme Court held that Clause 11 was not a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996, because it did not set up an impartial tribunal: the Chief Engineer was simply an employee of the very Board that was a party to the dispute, so he could not adjudicate impartially between the Board and the consumer. Relying on its earlier rulings (including Jaipur Zila Dugdh Utpadak Sahkari Sangh and Jagdish Chander), the Court explained that a valid arbitration clause needs a written agreement to refer disputes to an impartial private tribunal that both sides agree will decide the matter fairly and bindingly: a "referee" clause naming one party's own official does not qualify. Since the High Court had refused to decide the actual merits only because of this flawed clause, the Supreme Court set aside both High Court judgments and restored the writ petition to the Single Judge for a fresh decision on merits, without expressing any opinion on who should ultimately win.

Lesson Learnt

A contract clause that sends "disputes" to an employee or official of one of the contracting parties for a "final and binding" decision is not a genuine arbitration clause, and courts should not use it to shut the door on judicial review: genuine arbitration requires a neutral decision-maker.

Official source (sci.gov.in)View Judgment (PDF)

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