Government Ends Turkish Firm’s Indian Navy Ship Contract on National Security Grounds; Delhi High Court Prima Facie Holds Sovereign Decision Cannot Be Arbitrated
Government Removes Turkish Company From Indian Navy Fleet Support Ship Project; Delhi High Court Says National Security Decision Is Inherently Non-Arbitrable
Facts
The dispute concerns a Collaborator Contract dated 20 March 2020 between Hindustan Shipyard Limited (HSL) and Turkish company M/s Anadolu Deniz Insaat Kizaklari Sanayi Ve Ticaret A.S. for collaboration in the design and supply of key machinery equipment, technical assistance and project implementation for five Fleet Support Ships (FSS) for the Indian Navy.
On 16 August 2023, the Cabinet Committee on Security approved the FSS project but decided that it would be executed through indigenous industry without the involvement of the Turkish company. On 23 August 2023, the Ministry of Defence directed HSL to initiate termination proceedings. HSL consequently terminated the Collaborator Contract on 24 August 2023, invoking Article 23.8.
Efforts at an amicable settlement failed.
Nearly 30 months later, on 10 June 2026, the Turkish company raised the arbitration mechanism contained in the contract. It formally invoked arbitration on 8 July 2026 and filed its Statement of Claim before the Indian Council of Arbitration (ICA) on 7 August 2026.
The ICA registered Case No. INTARB-0035 and, by email dated 19 August 2026, directed HSL to file its Statement of Defence and nominate its arbitrator.
HSL approached the Delhi High Court seeking a declaration and permanent injunction restraining the Turkish company from proceeding with the arbitration and challenging the ICA’s direction.
Issues
The principal questions at the interim stage were:
- Whether the Government of India’s decision to proceed with the Navy project without the Turkish company was a sovereign decision concerning national security and therefore inherently non-arbitrable.
- Whether HSL’s consequential termination of the contract under Article 23.8 could be subjected to arbitration.
- Whether Article 25 constituted a binding arbitration mechanism despite use of the word “may.”
- Whether the Arbitral Tribunal itself should decide these questions under Section 16 of the Arbitration and Conciliation Act, 1996.
- Whether the Delhi High Court possessed territorial jurisdiction despite Visakhapatnam being stipulated as the seat and venue of arbitration.
Plaintiff’s Arguments — Hindustan Shipyard Limited
HSL argued that the contract was not an ordinary commercial arrangement.
It concerned design, machinery, technical assistance and implementation for five Fleet Support Ships for the Indian Navy, directly engaging naval preparedness, maritime capability and national security.
The Solicitor General argued that both the execution and termination of the contract flowed from decisions of the Government of India.
The Cabinet Committee on Security had decided that the project should proceed through indigenous industry without the Turkish collaborator. HSL merely implemented that sovereign decision.
Accordingly, the Turkish company’s claim seeking a declaration that termination was wrongful would necessarily require an arbitral tribunal to scrutinise the validity or consequences of a sovereign national-security decision.
HSL contended that this was impermissible under the principles laid down in Vidya Drolia v. Durga Trading Corporation.
HSL further relied upon Article 23.8, which dealt with impossibility of performance resulting from governmental prohibition.
It also argued that Article 25.1 used the word “may”, demonstrating that arbitration was not necessarily a mandatory dispute-resolution mechanism, relying upon the Supreme Court’s 2025 decision in BGM & M-RPL-JMCT (JV) v. Eastern Coalfields Ltd.
Defendant’s Arguments — Turkish Collaborator
The Turkish company raised a substantial jurisdictional objection.
It argued that:
- the contract was executed at Visakhapatnam;
- the project was to be performed there;
- termination was issued from Visakhapatnam;
- settlement meetings took place there;
- HSL itself was situated there; and
- Article 25.1(d) expressly designated Visakhapatnam as the seat and venue of arbitration.
It therefore contended that the Delhi High Court had no territorial jurisdiction merely because the ICA was situated in Delhi or because governmental decisions were taken there.
Reliance was placed upon BGS SGS Soma JV v. NHPC and other seat-jurisdiction precedents.
The company further argued that its claim was essentially one for damages and compensation arising from wrongful termination, rather than specific performance or an attempt to compel the Government to reverse its national-security decision.
Accordingly, such monetary contractual rights remained arbitrable.
It also invoked the kompetenz-kompetenz principle under Section 16, arguing that the Tribunal itself was competent to determine its jurisdiction and the arbitrability of the claims.
On the wording of the arbitration clause, it argued that although one portion used “may”, Article 25.1(b) subsequently used “shall”: once amicable settlement failed, unresolved disputes were mandatorily required to proceed to arbitration.
Analysis of the Law
1. Defence and National Security Decisions Can Occupy the Sovereign Domain
The Court treated Vidya Drolia as central to the dispute.
That judgment recognises that inalienable and non-delegable sovereign functions of the State are non-arbitrable, because their validity cannot be directly determined through a private adjudicatory process.
The High Court reasoned that if internal security falls within the sovereign domain, decisions concerning:
- national security;
- defence procurement;
- strategic military assets; and
- selection of foreign entities participating in such projects
may equally involve sovereign functions.
The present contract concerned five Fleet Support Ships intended to enhance the Indian Navy’s “blue water” capabilities and global presence.
The Court therefore considered the contract in its defence and strategic-security setting rather than as an ordinary procurement transaction.
Article 23.8 — Governmental Prohibition Not Confined to a Formal Ban
The Turkish company argued that Article 23.8 could operate only where the collaborator had first been prohibited or banned under Article 23.7.
The Court did not prima facie accept this narrow interpretation.
Article 23.8 used the expression:
“any such governmental prohibition.”
The Court considered this language sufficiently broad and open-ended to potentially cover governmental decisions beyond the precise prohibition or ban contemplated by Article 23.7.
Given that the agreement involved entities from two countries and concerned defence procurement, the Court observed that geopolitical developments could legitimately affect continuation of the arrangement.
Thus, governmental prohibition under Article 23.8 was not prima facie confined exclusively to the event specified in Article 23.7.
The Crucial Finding — “Decision of the Sovereign”
The Court found that HSL could not independently decide whether the Turkish collaborator should continue participating in the FSS project.
The contract itself had been entered into with governmental approvals.
Once the Government decided that the project should proceed without the Turkish entity and directed initiation of termination proceedings, HSL was bound to implement that decision.
The Court therefore reached the prima facie conclusion that the Government’s decision dated 23 August 2023 was:
a “decision of the Sovereign” and “non-arbitrable, per se.”
The consequential termination dated 24 August 2023 was regarded as flowing directly from that sovereign decision.
This distinction was crucial: the Court was not merely dealing with an ordinary commercial termination subsequently defended by invoking national security.
Section 16 Cannot Necessarily Cure Inherent Non-Arbitrability
The Turkish company argued that any jurisdictional objection could simply be raised before the Tribunal under Section 16.
The Court accepted the general principle of kompetenz-kompetenz.
However, it distinguished the present situation because its prima facie finding was that the sovereign decision was non-arbitrable ab initio.
Where the subject itself falls within an inalienable and non-delegable sovereign domain, the Court considered that requiring the sovereign to first submit that very decision to arbitral scrutiny could undermine the protection against private adjudication.
Thus, although Section 16 ordinarily empowers a tribunal to rule on its own jurisdiction, the Court considered its application potentially unviable in the peculiar circumstances.
Section 5 Does Not Bar the Suit at This Stage
The defendants also invoked Section 5 of the Arbitration Act, which mandates minimal judicial intervention.
The High Court distinguished between judicial interference with an otherwise arbitrable dispute and examination of a dispute alleged to fall outside arbitration altogether.
It relied upon the interaction between Sections 2(3) and 5, reasoning that the statutory policy of minimal interference could not automatically compel arbitration of a subject which the law itself regards as incapable of settlement through arbitration.
Visakhapatnam Seat vs Delhi Jurisdiction
This was another significant part of the decision.
The Turkish company relied heavily on the contractual designation of Visakhapatnam as the seat and venue and Supreme Court jurisprudence that the courts of the arbitral seat ordinarily exercise exclusive supervisory jurisdiction.
The High Court did not finally reject that legal principle.
Instead, it distinguished the present suit at the interim stage.
The Court observed that it was not presently exercising ordinary supervisory jurisdiction over an arbitration. Rather, the suit challenged whether a sovereign national-security decision could enter the arbitral domain at all.
Further, the plaint specifically pleaded that:
- the Cabinet Committee on Security’s decision was taken in New Delhi;
- the sovereign decision giving rise to termination was taken in Delhi; and
- the ICA was situated in New Delhi.
At the threshold stage, the averments in the plaint had to be taken as correct for considering territorial jurisdiction.
The Court therefore held that it was premature to conclusively hold that Delhi lacked territorial jurisdiction.
Importantly, this was not a final determination that Delhi had exclusive jurisdiction over the arbitration.
Precedent Analysis
Vidya Drolia v. Durga Trading Corporation
The decisive authority at the interim stage.
The Court relied particularly upon the principle that causes of action involving inalienable sovereign and public-interest functions of the State cannot ordinarily be subjected to private arbitration.
BGS SGS Soma JV v. NHPC
The Turkish company relied upon it for the proposition that designation of an arbitral seat operates akin to an exclusive jurisdiction clause.
The Court did not disagree with the principle but found the present dispute distinguishable because it involved the anterior question of whether a sovereign decision was arbitrable at all.
Mankastu Impex Pvt. Ltd. v. Airvisual Ltd.
Relied upon for the significance of the arbitral seat in determining supervisory jurisdiction. Again, the Court considered the present sovereign-decision issue materially different.
Kvaerner Cementation India Ltd. v. Bajranglal Agarwal
Relied upon for the Tribunal’s power under Section 16 to determine its own jurisdiction. The Court accepted the principle but considered that inherent non-arbitrability of a sovereign decision presented a distinct threshold issue.
BGM & M-RPL-JMCT (JV) v. Eastern Coalfields Ltd.
HSL relied upon this judgment concerning language such as “may be sought through arbitration”, which the Supreme Court had treated as merely enabling in the contractual setting before it.
The defendants distinguished it on the ground that Article 25.1(b) of the present contract used mandatory language once amicable settlement failed.
Court’s Reasoning
The Court considered three ingredients necessary for interim relief:
prima facie case, balance of convenience and irreparable injury.
All three were found, prima facie, in HSL’s favour.
The decisive chain was:
Five Fleet Support Ships for Indian Navy → defence procurement and strategic capability → Government approval necessary for foreign collaborator → Government subsequently decides project must proceed without that collaborator → HSL compelled to terminate → decision involves sovereign/national-security considerations → sovereign decision prima facie cannot be subjected to private arbitral adjudication.
The Court consequently found that HSL had established a strong prima facie case.
Conclusion
The Delhi High Court did not finally decide the suit or permanently terminate the arbitration.
It passed an interim order.
Since the Court prima facie considered the Ministry of Defence/Government of India’s decision dated 23 August 2023 to be a:
“decision of the sovereign” concerning national security and “inherently non-arbitrable ab initio,”
it directed that the ICA’s email dated 19 August 2026 in ICA Case No. INTARB-0035 be kept in abeyance until the next date of hearing.
Notice was issued to the defendants.
The Court expressly clarified that its observations were only prima facie and did not constitute findings on the merits.
This qualification is important for Raw Law reporting: the judgment should not be presented as a final ruling permanently barring the Turkish company from arbitration.
Case Details
Case: Hindustan Shipyard Limited v. M/s Anadolu Deniz Insaat Kizaklari Sanayi Ve Ticaret A.S. & Anr.
Court: Delhi High Court
Case No.: CS(COMM) 1008/2026 with I.A. 25198/2026, I.A. 25199/2026 & I.A. 25200/2026
Judge: Justice Tushar Rao Gedela
Reserved: 16 September 2026
Delivered: 18 September 2026
Result: ICA arbitration direction kept in abeyance at the interim stage; Court prima facie holds the Government’s national-security decision inherently non-arbitrable; suit and interim application remain pending.
