Mandatory Arbitration Clause Ousts Writ Jurisdiction Under Article 226 | Concession Agreement Dispute : Uttarakhand HC

The Uttarakhand High Court has reaffirmed that where a concession agreement contains a mandatory arbitration clause, courts must refrain from adjudicating disputes on merits, even when termination is alleged. This judgment underscores the primacy of contractual dispute resolution mechanisms over judicial intervention in commercial contracts.

Background & Facts

The Dispute

The dispute arises from a Concession Agreement dated 07.11.2023 between M/s Manish Taxi Service (petitioners) and the Airports Authority of India (AAI, respondent) for the design, development, operation, and management of Food and Beverage (F&B) outlets at Dehradun Airport. The agreement granted the petitioners exclusive rights to operate 10 F&B outlets across a total gross floor area of 429.61 square meters for a term of seven years. The petitioners were declared L-1 bidder on 24.05.2023 after quoting the highest per-passenger rate of Rs. 51.70. A Letter of Intent (LOI) was issued on the same date, requiring the petitioners to furnish a bank guarantee of Rs. 7,46,67,208 in three installments: Rs. 1 crore (03.07.2023), Rs. 6 crores (09.10.2023), and Rs. 46.68 lakhs (07.11.2023). The Concession Agreement was formally executed on 07.11.2023.

Key Facts

• The petitioners deposited the full bank guarantee amount as required under Clause 9 of the LOI.
• The AAI delivered possession of the F&B outlets in phases from 29.11.2023 to September 2024, contrary to the petitioners’ claim that full possession should have been granted 90 days after the LOI.
• AAI billed the petitioners on a pro-rata basis from the date of access to each site, as per the contract terms.
• The petitioners disputed the billing methodology and failed to pay the demanded license fees.
• As of 31.03.2025, AAI claimed outstanding dues of Rs. 3,77,28,522 excluding penal interest.
• On 02.04.2025, AAI issued a Show Cause Notice alleging non-payment under Clause 10.4.2 of the Agreement.
• A second notice dated 16.04.2025 warned that dues would be adjusted from the bank guarantee without further notice.
• On 09.05.2025, AAI encashed Rs. 4,78,93,927 from the bank guarantee (Rs. 3,89,05,633 principal + Rs. 89,88,294 penal interest), reducing the security to Rs. 2,67,74,093.
• On 15.05.2025, AAI issued a notice requiring the petitioners to replenish the security deposit within 15 days (by 30.05.2025), failing which the Agreement would be terminated.
• On 31.05.2025, AAI terminated the Concession Agreement and directed cessation of operations from 06.06.2025.
• On 01.05.2025, AAI issued a Notice Inviting Tender (NIT) for a short-term snack bar license at Dehradun Airport, which the petitioners challenged as violative of their exclusive rights.

Procedural History

• 25.01.2023: AAI issued RFP for F&B outlets.
• 24.05.2023: Petitioners declared L-1 bidder; LOI issued.
• 03.07.2023: First bank guarantee of Rs. 1 crore deposited.
• 09.10.2023: Second bank guarantee of Rs. 6 crores deposited.
• 07.11.2023: Concession Agreement executed; third bank guarantee deposited.
• 29.11.2023: First phase of possession delivered.
• 02.04.2025: Show Cause Notice issued by AAI.
• 16.04.2025: Second notice warning of adjustment from bank guarantee.
• 09.05.2025: Bank guarantee encashed for Rs. 4,78,93,927.
• 15.05.2025: Notice to replenish security deposit within 15 days.
• 02.05.2025: Petitioners filed Application under Section 9 of the Arbitration and Conciliation Act, 1996 before Commercial Court, Dehradun, seeking stay on encashment.
• 16.05.2025: Petitioners filed another application seeking stay on 15.05.2025 notice.
• 28.05.2025: Commercial Court dismissed Section 9 application, holding mediation must be exhausted first.
• 01.06.2025: Petitioners filed Appeal (A.O. No. 168 of 2025) against Commercial Court’s order.
• 06.06.2025: AAI terminated Concession Agreement and directed cessation of operations.
• 16.06.2025: Petitioners filed Writ Petition (M/B) No. 381 of 2025 challenging termination and Writ Petition (M/B) No. 383 of 2025 challenging the NIT.
• 27.06.2025: Interim stay granted on the NIT.
• 20.03.2026: Judgment pronounced by Uttarakhand High Court.

The Parties' Positions

For the Petitioners

• AAI breached the contract by delivering possession in phases, not within 90 days of LOI.
• The demand for license fees was arbitrary and not in accordance with the contract.
• Encashment of bank guarantee without prior notice violated contractual and statutory norms.
• Termination was premature and punitive, given pending arbitration.
• The NIT for a snack bar violated their exclusive rights under the Concession Agreement.
• The Commercial Court’s dismissal of Section 9 application was erroneous.

For the Respondent (AAI)

• The gestation period was 60 days per site, not 90 days from LOI, as per contract.
• Billing was pro-rata and contractually valid.
• Petitioners defaulted on payments despite multiple notices.
• Encashment of bank guarantee was permitted under Clause 10.4.2 and Clause 12.2 of the Agreement.
• Termination followed due process and was justified.
• The NIT was for a separate, small site (15 sq. m) and did not conflict with the Concession Agreement.
• Arbitration clause is mandatory and binding; writ jurisdiction is not maintainable.

Relief Sought

The petitioners sought:

• Quashing of the termination order dated 31.05.2025.
• Stay on the NIT dated 01.05.2025.
• Restraint on AAI from interfering with their operations under the Concession Agreement.
• Direction to reinstate the Concession Agreement.
• Direction to restore the encashed bank guarantee.

The Legal Issue

The central question was whether a writ petition under Article 226 of the Constitution is maintainable to challenge termination of a concession agreement and issuance of a competing tender, where the contract contains a mandatory arbitration clause requiring mediation followed by arbitration.

Arguments Presented

For the Petitioner

The petitioners relied on S.B.P. & Co. v. Patel Engineering Ltd. and Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. to argue that while arbitration clauses are generally enforceable, courts retain jurisdiction to grant interim relief under Section 9 of the Arbitration and Conciliation Act, 1996. They contended that the termination was illegal and mala fide, and that the Commercial Court’s dismissal of their Section 9 application was unjust. They further argued that the NIT was issued in bad faith to circumvent their contractual rights and that the matter involved public interest due to AAI’s status as a statutory body.

For the Respondent

The respondent relied on Dharmendra Kumar v. Union of India and M/s. K. S. Choudhary v. Union of India to assert that where a valid arbitration clause exists, courts must decline to entertain writ petitions on matters falling within its scope. The AAI emphasized that the Concession Agreement explicitly mandated mediation and arbitration under Article 22, and that the petitioners had already initiated proceedings under Section 9. The termination was a contractual remedy, not an administrative action, and therefore not subject to judicial review under Article 226.

The Court's Analysis

The Court examined the structure and intent of Article 22 of the Concession Agreement, which mandates that all disputes be resolved first through mediation and, if unresolved within 120 days, through arbitration. The Court noted that Clause 22.1.2.2 explicitly requires parties to continue performing their obligations under the Agreement even during dispute resolution, unless the contract is repudiated or terminated.

"The parties have contractually agreed to a structured dispute resolution mechanism, and the invocation of arbitration is not merely an option but a mandatory precondition to any judicial intervention."

The Court observed that the petitioners had already approached the Commercial Court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim relief against encashment of the bank guarantee. Although the Commercial Court initially dismissed the application on grounds of non-exhaustion of mediation, the Uttarakhand High Court had earlier allowed the appeal and remanded the matter for adjudication on merits. The Court emphasized that the petitioners had not yet exhausted the arbitral remedy, and that the validity of termination, encashment, and the NIT all fell squarely within the scope of the arbitration clause.

The Court held that the mere fact that the Commercial Court was closed for summer vacations did not justify bypassing the contractual dispute resolution mechanism. The Court further clarified that the existence of a valid arbitration clause ousts the jurisdiction of the High Court under Article 226, unless the dispute is of a public law nature or involves violation of fundamental rights. Here, the dispute was purely contractual and commercial.

The Court also noted that the NIT for a 15 sq. m snack bar was not in direct conflict with the 429.61 sq. m F&B concession, and that the petitioners’ challenge to it was premature and intertwined with the larger contractual dispute.

The Verdict

The writ petitions were dismissed. The Court held that the petitioners must pursue their remedies through arbitration as mandated by the Concession Agreement. No interim relief was granted. The Court explicitly stated that its order does not express any opinion on the merits of the termination, encashment, or NIT, and all contentions are left open for adjudication before the arbitral tribunal. The petitioners are directed to proceed expeditiously with the Section 9 application pending before the Commercial Court, Dehradun.

What This Means For Similar Cases

Arbitration Clauses Override Writ Jurisdiction in Commercial Disputes

• Practitioners must assess whether a dispute arises from a contractual relationship with a mandatory arbitration clause before filing a writ petition.
• Courts will dismiss writ petitions challenging termination, payment disputes, or tender issues if the contract prescribes arbitration as the exclusive remedy.
• Public sector entities cannot be subjected to judicial review under Article 226 merely because of their status, if the dispute is contractual.

Section 9 Applications Must Be Pursued Diligently

• Section 9 applications are not a substitute for arbitration but a bridge to it.
• Delays in pursuing Section 9 applications due to court vacations or procedural hurdles do not justify bypassing arbitration.
• Parties must exhaust mediation and arbitration remedies before seeking judicial intervention, even if interim relief is sought.

NITs During Subsisting Concession Agreements Are Not Per Se Illegal

• Issuance of a separate, limited-scope tender during the term of a larger concession does not automatically violate exclusivity.
• The nature, size, and scope of the new tender must be compared with the existing agreement to determine conflict.
• Challenges to such NITs must be raised within the arbitral forum unless they involve manifest abuse of power or public interest violation.