Municipal 'Self-Government' Doesn't Take Works Contract Disputes Outside State Arbitration Tribunal: MP High Court

The Madhya Pradesh High Court at Jabalpur has held that disputes arising out of works contracts with municipal corporations covered by the MP Madhyastham Adhikaran Adhiniyam, 1983 cannot be taken to arbitration under the Arbitration and Conciliation Act, 1996, and must instead be decided by the state's statutory arbitration tribunal.

Justice Vivek Jain held that although municipalities are described in the Constitution as institutions of local self-government, this does not place them beyond the financial and supervisory control of the State Government. Rejecting the contractor's argument, the court observed,

“The self-government as prescribed in Article 243-P(e) has to be understood in the manner of self-government of the Municipal area or the local area for which the Municipality is functioning. It cannot be construed to be a self-government institution vis-à-vis the State Government and to bring it out of financial and supervisory control of the State Government.”

The dispute arose from a contract awarded by the Bhopal Municipal Corporation to Maverick Developer and Colonizers Pvt. Ltd. for construction-related works under a water supply distribution project.

Differences later emerged between the parties. The contractor moved the High Court seeking appointment of an arbitrator under Section 11(6) of the Arbitration Act. It was not in dispute that the agreement was a works contract. The disagreement was over the forum that could decide it.

The contractor argued that a Municipal Corporation is not a “public undertaking” under the 1983 Act. Relying on Articles 243P and 243Q of the Constitution, it was contended that municipalities are autonomous institutions of local self-government and are not substantially controlled by the State Government.

The Municipal Corporation opposed the plea, submitting that it is a statutory body subject to deep and pervasive state control and clearly falls within the definition of a public undertaking under the 1983 la

Rejecting the contractor's submissions, the court said that such an interpretation would upset the constitutional scheme. It cautioned, “The interpretation which is being suggested to this Court would indeed catapult the Municipalities to the status of quasi-states under the Constitution, which is nowhere contemplated.”

After examining provisions of the MP Municipal Corporation Act, the court noted that the state government exercises control over appointments, finances, taxation, audit, administration, and even dissolution of municipal corporations.

It concluded, “It is clear that the Municipal Corporation works under substantial control of the State Government and it cannot be inferred that the Municipal Corporation is a body not substantially controlled by the State Government.”

Relying on the Supreme Court's Constitution Bench ruling in M.P. Rural Road Development Authority, the High Court held that the Arbitration Act does not override the 1983 state law.

Since the dispute arose out of a works contract with a public undertaking, the court ruled that no arbitrator could be appointed under Section 11(6) and dismissed the petition so that contractor free to approach the State Arbitration Tribunal.