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Keeps Arbitration in Abeyance, Holds
In a significant interim ruling, the has directed that arbitral proceedings initiated by Turkish company against before the be kept in abeyance. Justice Tushar Rao Gedela, presiding over the commercial suit, found that the 's decision to exclude the Turkish collaborator from a project to construct Fleet Support Ships for the was a concerning national security and defence procurement, and therefore .
The order, delivered on , grants to HSL pending final adjudication of the suit. The Court’s reasoning draws heavily on the ’s landmark judgment in , which holds that sovereign functions of the State cannot be subjected to private arbitration.
Background: A Collaborator Contract for Naval Fleet Support
The dispute originates from a Collaborator Contract executed on between HSL and . The contract envisioned collaboration in the design and supply of key machinery equipment, technical assistance, and project implementation for five Fleet Support Ships intended to enhance the ’s blue-water capabilities. The agreement was entered into with the approval and concurrence of the , the , and the —underscoring its strategic importance.
On , the approved the Fleet Support Ships project but made a pivotal decision: the project would be executed through indigenous industry, without the involvement of . Subsequently, on , the directed HSL to initiate termination proceedings. HSL complied the next day, invoking Article 23.8 of the contract, which deals with impossibility of performance due to governmental prohibition.
Efforts at amicable settlement failed. Nearly 30 months later, in June 2026, invoked the arbitration clause (Article 25) and filed its Statement of Claim before the ICA on . The ICA registered the case and directed HSL to file its Statement of Defence and nominate an arbitrator. Instead, HSL approached the seeking a to restrain the arbitration.
The Core Legal Question: Is a Arbitrable?
The central issue before the Court was whether the Government of India’s decision to proceed with the Navy project without the Turkish collaborator constituted a , and if so, whether that decision could be subjected to arbitration.
HSL, represented by , argued that the contract was not an ordinary commercial arrangement. It was intrinsically linked to national maritime security, naval readiness, and defence procurement. Mehta submitted that both the execution and termination of the contract flowed from decisions of the Government of India, and that the ’s decision was a sovereign act. He contended that allowing an arbitral tribunal to scrutinise the validity or consequences of that decision would be impermissible under the principles laid down in Vidya Drolia .
, represented by , raised a preliminary objection on territorial jurisdiction. Nayar pointed out that the contract was executed in Visakhapatnam, was to be performed there, the termination notice was issued from Visakhapatnam, and Article 25.1(d) expressly designated Visakhapatnam as the seat and venue of arbitration. He argued that the had no jurisdiction to entertain the suit. On the merits, he contended that the claim was essentially for damages arising from wrongful termination, not an attempt to reverse the , and therefore remained arbitrable. He also invoked the kompetenz-kompetenz principle under , arguing that the tribunal itself should decide questions of arbitrability.
Court’s Analysis: Defence Procurement and National Security as Sovereign Functions
Justice Gedela undertook a detailed analysis of the contract and the applicable law. He first examined Articles 23.7 and 23.8 of the contract. Article 23.7 dealt with prohibition or ban by the Indian or Turkish Government, while Article 23.8 provided for consequences where the contract became impossible to perform due to governmental prohibition. The Court rejected ’s argument that Article 23.8 could only operate if there was a formal prohibition under Article 23.7. It observed that the phrase “any such governmental prohibition” was broad enough to cover governmental decisions beyond a formal ban, especially given the geopolitical context of a defence procurement involving a foreign entity.
Turning to the nature of the decision, the Court noted that the contract concerned the construction of Fleet Support Ships for the —strategic defence assets directly linked to national security. Relying on Vidya Drolia , the Court held that if internal security is a , then national security and defence procurement for the armed forces clearly fall within the expression “.” The Court observed:
“Surely, if internal security is a , then national security, and matters related to defence procurement for the armed forces would clearly fall within the expression “”, and the decision taken in such context could be expressed as “”.”
The Court further held that the Government’s decision dated was a “decision of the Sovereign” and therefore . HSL’s consequential termination was merely implementing that ; it was not an independent commercial act.
Territorial Jurisdiction and the Seat Argument
On the jurisdictional challenge, the Court distinguished the present case from typical supervisory jurisdiction over arbitration. The suit was not about supervising an ongoing arbitration; it was about whether the itself could be arbitrated at all. The plaint specifically pleaded that the ’s decision was taken in New Delhi, and that the giving rise to termination was taken in Delhi. At the threshold stage, the Court held that those averments must be taken as correct. Therefore, it was premature to conclude that Delhi lacked territorial jurisdiction. The Court noted that this was not a final determination, but sufficient for the purpose of granting interim relief.
Section 16 and the Futility of Kompetenz-Kompetenz
argued that the arbitral tribunal could rule on its own jurisdiction under Section 16. The Court accepted the general principle but found it inapplicable in the present context. Once a finding had been made that a was , requiring the sovereign to submit that very decision to arbitral scrutiny would undermine the protection against private adjudication. The Court observed:
“The inalienability and the non-delegable nature in terms of Vidya Drolia (supra), clearly indicates that the insulation from arbitral interference, available to the inheres in the Sovereign, and at all times to come.”
Thus, Section 16 could not cure inherent non-arbitrability.
and
Finding a strong case in HSL’s favour, the Court also held that the lay in favour of HSL. Allowing the arbitration to proceed would require the sovereign to defend its national-security decision before a private tribunal, causing to the public interest. Accordingly, the Court directed that the ICA’s email dated in Case No. INTARB-0035 be kept in abeyance until the next date of hearing. Notice was issued to the defendants.
Implications for Defence Procurement and Arbitration Law
This interim order sends a clear signal that national-security decisions in defence procurement will be treated as sovereign functions falling outside the scope of arbitration. The ruling reinforces the Vidya Drolia framework and provides a potential shield for government entities facing arbitration claims arising from policy decisions in sensitive sectors.
Legal practitioners should note the Court’s approach to territorial jurisdiction: the seat of arbitration does not necessarily oust the jurisdiction of a court where the was taken, at least at the interim stage. The distinction between supervisory jurisdiction and a challenge to arbitrability based on is a critical nuance.
The case also highlights the limits of the kompetenz-kompetenz principle. Where the subject matter is inherently , the tribunal cannot assume jurisdiction even to decide on its own jurisdiction. This may lead to increased litigation at the pre-arbitration stage in cases involving government contracts with national-security dimensions.
Conclusion
The ’s order is a significant development in Indian arbitration law, particularly at the intersection of sovereign functions and commercial arbitration. While the ruling is only and the suit remains pending, it provides a strong indication that courts will not hesitate to intervene when national-security decisions are challenged through arbitration. The Turkish company’s path to arbitration is now blocked until the next hearing, and the outcome of the suit will be closely watched by both the legal community and the defence industry.
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