State Govt. Has No Authority U/S.143-A(3) Maharashtra Municipal Councils Act To Appoint Arbitrator In Absence Of Arbitration Agreement: Supreme Court

The Apex Court was considering a special leave petition challenging the final judgment of the Bombay High Court in exercise of jurisdiction under Section 39 of the Arbitration Act, 1940.

The Division Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held, “State Government has no authority under Section 143-A(3) of the Maharashtra Municipal Councils, Nagar Panchayats and Industrial Townships Act, 1965 to appoint an arbitrator for the agent and the Municipal Council. The exercise of such power by the government cannot be equated to Section 4 of the Arbitration Act, 1940, for there is no such agreement”, it added.

Factual Background

In March 1994, while exercising powers conferred under Section 143-A of the 1965 Act, the Municipal Council issued a tender for the collection of octroi for a period of one year. The petitioner participated in the tender along with other bidders and was declared successful, having submitted its bid for an amount of Rs 6,75,00,000. The Municipal Council entered into an agreement with the petitioner for the said octroi collection contract.

After commencing work, the petitioner addressed a letter to the Chief Officer of the Municipal Council requesting that the amount of Rs 6,74,00,000 fixed as a minimum reserve price/ bid amount be reduced by Rs 40,78,517 on the ground that the same was contrary to the norms to determine the minimum reserve price. The matter reached the High Court, and the petitioner was granted the liberty to adopt appropriate proceedings. The petitioner then approached the Urban Development Department of the Government of Maharashtra, requesting the State Government to appoint an arbitrator to resolve the dispute.

The Arbitrator held that the minimum reserve price of Rs 6,74,00,000 as fixed by the Municipal Council was incorrect and declared the minimum reserve price as Rs 6,20,89,843. The petitioner thereon filed a Miscellaneous Application under Section 14 read with Section 17 of the 1940 Act, seeking that the award be made a rule of the Court. The Municipal Council objected to the same, but a direction was passed to draw a decree in terms of the arbitral award. The Municipal Council challenged the said order, and vide the order impugned before the Apex Court, the Bombay High Court reversed this decision and set aside the award.

Reasoning

The Bench explained that the power to collect octroi and to prescribe the method and manner of such collection is within the province of the Municipal Council. “All that Section 143A(3) prescribes is that the State Government can issue policy directions with respect to the manner and procedure by which the power is to be exercised. Under no circumstances can such a power be extended to appoint an arbitrator unilaterally, notwithstanding the statutory or contractual relationship that may exist between the Municipal Council and its agent”, it added.

On a perusal of clause 22 of the agreement, the Bench found that the parties had not agreed upon resolving the existing disputes between them through arbitration. The Bench concurred with the view of the High Court as regards the interpretation of clause 22, as well as the unsatisfactory circumstances in which the Municipal Council was compelled to participate in the arbitral proceedings.

The Bench stated, “In fact, clause 22 leaves no space for resolution of disputes through an alternative dispute resolution methodology. This is for the reason that octroi is an important source of income, and the power to impose and collect octroi is integral to the jurisdiction and functioning of Municipal bodies under Part IXA of the Constitution. It is for this reason that the power to resolve disputes is kept within the fold of the governmental hierarchy. In this case, access to justice of an agent of the government in a contract for collection of octroi could be through judicial review, civil or statutory remedies if any.”

Taking note of various factors, including the absence of a valid arbitration agreement, lack of jurisdiction for appointment, absence of consensus ad idem for creation of an arbitration agreement and the arbitrator lacking inherent jurisdiction due to the absence of an arbitration agreement, the Bench dismissed the Petition.

Cause Title: M/s Bharat Udyog Ltd. v. Ambernath Municipal Council Through Commissioner (Neutral Citation: 2026 INSC 288)

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