“Excepted Matters” Cannot Exclude Justice: Finality/No-Arbitration Clauses in Government Contracts Apply Only to Quantification Where Liability is Admitted

1. Introduction

The Supreme Court in M/s. ABS Marine Services v. Andaman and Nicobar Administration (2026 INSC 274, decided on 23-03-2026) addressed a recurring problem in State contracts: clauses that confer unilateral decisional power on the Government (or its instrumentalities), declare that decision “final and binding”, and then attempt to bar both courts and arbitration.

The appellant, M/s ABS Marine Services (“Manning Agent”), entered into a manning agreement with the respondent, The Andaman and Nicobar Administration, for manning 17 vessels. After a vessel (M.V. Long Island) grounded and suffered damage, the Administration issued a show cause notice and ultimately unilaterally recovered approximately Rs. 2.87 crores from the appellant’s bills as “penalty/financial loss” under the contract’s “Default” clause (Clause 3.20).

The dispute went to arbitration (pursuant to a Section 11 appointment by the Supreme Court). The arbitrator awarded refund with interest and costs. While the District Judge dismissed the Administration’s Section 34 challenge, the High Court (in a Section 37 appeal) set aside the award as being without jurisdiction, holding the matter fell within an “excepted” area due to Clause 3.20’s “finality/no court/no arbitration” language.

The core issue before the Supreme Court was whether the High Court was correct in treating the dispute as non-arbitrable due to Clause 3.20, and more fundamentally, whether contractual interpretation—especially of State-drafted clauses—can disregard basic rule-of-law constraints.

2. Summary of the Judgment

The Supreme Court allowed the appeals, set aside the High Court’s judgment, and restored the arbitral award. It held that:

• A contractual clause cannot be construed to permit one contracting party (the State) to decide disputed questions of the other party’s breach/negligence and then immunize that decision from review.
• Clause 3.20’s “finality/no court/no arbitration” portion, on a proper construction consistent with rule-of-law principles and avoidance of remedial vacuum, could only apply (at best) to quantification in cases where liability is admitted or undisputed.
• Where the Manning Agent disputes liability (wilful act/omission/neglect/negligence), the dispute falls within the ambit of the widely worded arbitration clause (Clause 3.22).
• The High Court’s approach to “excepted matters” was flawed; the arbitrator acted within jurisdiction.

3. Analysis

3.1 Precedents Cited

(a) State of Karnataka v. Shree Rameshwara Rice Mills Thirthahalli

The Court relied heavily on this decision to reaffirm the distinction between: (i) a party’s contractual power to assess damages once breach is admitted/undisputed, and (ii) the impermissibility of that party adjudicating the very existence of breach when contested.

The Supreme Court in the present case adopted the same logic: the Administration’s “final” decision cannot extend to deciding disputed liability. Finality can, if at all, attach only after the triggering breach/default is admitted or not put in issue.

(b) J.G. Engineers Private Limited v. Union of India and Another.

This precedent was used for the categorical principle that a contract cannot make the alleging party the judge of breach:

“...the question whether the other party committed breach cannot be decided by the party alleging breach... That question can only be decided by... a court or an Arbitral Tribunal.”

The Court treated this as a rule-of-law minimum in contractual interpretation—particularly when the State seeks unilateral, unreviewable decisional authority.

(c) Sri Vedagiri Lakshmi Narasimha Swami Temple v. Induru Pattabhirami Reddi

Though arising in a statutory-bar context, it supplied a broader interpretive discipline: courts should avoid constructions that create a “vacuum” in remedies. The Supreme Court imported that reasoning into the contractual setting here: a clause that purports to bar courts and also says “No arbitration proceedings on this account” cannot be read to eliminate all fora for redress.

(d) Northern Railway v. Sarvesh Chopra

The Court distinguished this line of authority. It accepted that “excepted matters” can be carved out by contract, but held that the cited cases were not germane because the central question here was not merely identifying an excepted category; it was whether the clause could be read as excluding adjudication of disputed liability and thereby undermining rule-of-law principles.

3.2 Legal Reasoning

(i) Harmonious construction of Clause 3.20 and Clause 3.22

Clause 3.22 was “widely worded” and covered “any dispute... arising out of this Agreement”. The Administration relied on Clause 3.20’s finality language (“cannot be challenged in any court of law. No arbitration proceedings on this account”) to argue a jurisdictional bar.

The Supreme Court held that Clause 3.20 must be read narrowly and coherently with Clause 3.22, not as a device to negate adjudication. If Clause 3.20 were read to bar both courts and arbitration even when liability is disputed, it would:

• permit the Administration to be a judge in its own cause (violating basic fairness and rule-of-law norms); and
• create a remedial vacuum (incompatible with the legal system’s commitment to enforceable rights and remedies).

(ii) What “Administration’s decision shall be final” can lawfully mean

The Court reframed “finality” as relating only to a limited domain:

• Liability disputed (whether there was wilful act/omission/neglect/negligence causing financial loss): must be adjudicated by an independent forum—here, arbitration under Clause 3.22.
• Liability admitted/undisputed: the Administration may quantify and recover; and only that quantification may be described as “final” (though the Court expressed “serious reservations” even about excluding court scrutiny of quantification, but did not decide it as it did not arise directly).

(iii) “Excepted matters” cannot be used to exclude justice altogether

The Supreme Court accepted the concept of “excepted matters” but confined it sharply: at most, the “excepted” area here could be where the agent admits default yet disputes the Administration’s computation. Since ABS Marine disputed liability itself, the case did not fall within any legitimate “excepted” enclave.

The Court’s broader normative point was explicit: “Matters may be ‘excepted’ from arbitration... but a vacuum in legal remedies cannot result.” It encapsulated the holding in the aphorism: “‘Except’ matters one may but ‘Exclude’ justice, one cannot.”

(iv) The arbitral tribunal’s jurisdiction to interpret the contract

Having found the dispute arbitrable, the Court treated the arbitrator’s contract interpretation (scope of manning agent duties; whether Clause 3.20 default was established) as squarely within arbitral competence. The Administration did not press other grounds against the award before the Supreme Court, beyond the “excepted matter/jurisdiction” point.

3.3 Impact

(a) On government contracting practices

The judgment is a strong warning against State-drafted clauses that attempt to: (i) permit unilateral determinations of breach and loss, and (ii) foreclose both arbitration and court review. The Court expressly described such drafting as “grossly discriminatory” in its practical operation (noting, for example, that the Administration reserved the right to initiate proceedings for recovery of any shortfall, while attempting to deny the private party comparable recourse).

(b) On arbitration and “excepted matters” jurisprudence

The decision clarifies that “excepted matters” analysis cannot be purely textual or mechanical where the clause would:

• make a party the judge of its own claim, or
• strip the counterparty of any forum to test disputed liability.

Future courts reviewing Section 34/37 challenges may be more resistant to “jurisdiction” objections founded on unilateral-finality clauses, particularly where an arbitration clause is broadly framed.

(c) On unilateral recoveries/penalties

While the Court did not lay down a general rule on unilateral recovery mechanisms, the reasoning implies: unilateral recovery premised on a disputed breach is highly vulnerable unless there is independent adjudication. This may influence disputes involving set-off/recovery from running bills in public contracts.

4. Complex Concepts Simplified

• “Excepted matters”: Issues that the contract expressly removes from the arbitrator’s authority. This judgment limits such exclusion so it does not erase all remedies, especially on disputed liability.
• “Final and binding” clauses: Provisions stating one party’s decision cannot be challenged. The Court held such language cannot be read to make the alleging party decide contested breach and then bar review.
• Section 9 CPC: Civil courts have jurisdiction over civil disputes unless expressly/impliedly barred. The Court used this to reinforce that exclusion of remedies is not lightly inferred and should not create a remedial “vacuum”.
• Section 28 of the Indian Contract Act, 1872: Agreements absolutely restraining legal proceedings are void to that extent, while arbitration agreements are protected (Exception 1). The Court used this statutory setting to underline that contract interpretation should not produce total restraint of remedies.
• Section 34 and Section 37 (Arbitration and Conciliation Act, 1996): Section 34 is the primary challenge to an award; Section 37 is the appeal. The Supreme Court held the High Court, in a Section 37 posture, erred by treating the award as jurisdictionally barred based on an untenable reading of Clause 3.20.

5. Conclusion

The Supreme Court’s key contribution is a rule-of-law anchored method of reading State contract clauses: where an arbitration clause is broad, a “default/finality/no-arbitration” clause cannot be construed to allow the State to unilaterally decide disputed breach/negligence, recover money, and then insulate itself from all adjudicatory scrutiny. At most, any “finality” can operate in a narrow band—typically quantification where liability is admitted.

The judgment strengthens remedial access in government-contract disputes and signals that “excepted matters” drafting cannot be a vehicle to “exclude justice” by creating a remedial vacuum.