Arbitration of Inter-State Disputes in India: Constitutional & Legal Perspectives

Inter-State Disputes Subject to Arbitration: An Indian Legal Perspective

India, as a federal country, often experiences inter-state disputes on matters like river waters, boundaries, infrastructure projects, and taxation. While the Supreme Court under Article 131 of the Constitution holds exclusive jurisdiction over such disputes, arbitration has increasingly become a viable alternative for resolving non-constitutional inter-state conflicts, especially those involving commercial or administrative arrangements between states.

This article explores whether interstate disputes can be arbitrated under Indian law, discusses the relevant constitutional and statutory provisions, and evaluates the challenges and future of arbitration in such matters.

🔹 What are Inter-State Disputes?

Inter-state disputes are conflicts between two or more states of India involving legal rights, governance issues, or contractual breaches. These may relate to:

• Water sharing (e.g., Cauvery, Krishna disputes)
• Territorial boundaries (e.g., Assam-Mizoram border conflict)
• Power/electricity sharing
• Taxation or GST compensation
• Joint infrastructure projects

These disputes, if not addressed in time, can hinder national development and disrupt cooperative federalism.

🔹 Constitutional Provisions Governing Inter-State Disputes

🔸 1. Article 131 – Original Jurisdiction of the Supreme Court

Article 131 of the Indian Constitution grants exclusive original jurisdiction to the Supreme Court over disputes:

• Between the Government of India and one or more States;
• Between two or more States.

Key Feature: The dispute must involve a question of law or fact on which the existence or extent of a legal right depends.

✅ Case Reference: State of Karnataka v. State of Andhra Pradesh (2000)
The Supreme Court held that only legal disputes (not political differences) can be adjudicated under Article 131.

🔸 2. Article 262 – Inter-State Water Disputes

To prevent overlapping jurisdiction, Article 262 allows Parliament to exclude the jurisdiction of all courts, including the Supreme Court, in certain inter-state water disputes.

It states:

• Clause (1): Parliament may by law provide for the adjudication of water disputes.
• Clause (2): Parliament may provide that neither the Supreme Court nor any other court shall have jurisdiction over such disputes.

🔹 Statutory Reference: Inter-State River Water Disputes Act, 1956
This law establishes tribunals for adjudicating river water disputes. Though they function like arbitration panels, they are not governed by the Arbitration and Conciliation Act, 1996.

🔹 Can Inter-State Disputes Be Referred to Arbitration?

The possibility of arbitrating interstate disputes depends on the nature of the dispute:

✅ Arbitrable:

• Contractual disputes between states (e.g., infrastructure project agreements, MoUs).
• Commercial agreements where states are parties and consent to arbitration.

❌ Non-Arbitrable:

• Disputes involving sovereign powers or legal rights under Article 131.
• Water disputes if covered by Article 262 and relevant tribunals.
• Issues involving public law or constitutional interpretation.

🔹 Legal Basis for Arbitration Between States

🔸 1. Arbitration and Conciliation Act, 1996

Though this Act primarily governs commercial arbitration, it does not prohibit states from entering into arbitration agreements with each other.

• Section 7 defines an arbitration agreement as a mutual agreement to submit disputes to arbitration.
• Section 2(1)(f) allows for “international commercial arbitration” involving at least one party that is a State entity.

While not explicitly covering inter-state arbitration, the law allows any two legal entities—including state governments—to mutually agree to arbitrate, provided:

• There is a valid arbitration agreement.
• The dispute is not barred by statute or public policy.

✅ Example: If two Indian states enter into a joint metro project and include an arbitration clause for payment disputes, such disputes can be referred to arbitration.

🔹 Scope of Arbitrability: Recent Trends & Judicial Views

In State of Haryana v. State of Punjab (2002), the Supreme Court reasserted that disputes under Article 131 must involve the enforcement of legal rights, and the Court does not entertain political or administrative grievances.

However, the judiciary has not closed the door on arbitration for inter-state contractual arrangements. In fact, various judgments (e.g., Gujarat State Civil Supplies v. Mahakali Foods) have emphasised that when states act as commercial parties, they are bound by the contracts they enter, including arbitration clauses.

🔹 Benefits of Inter-State Arbitration

1. ✅ Neutral & impartial resolution
2. ✅ Faster than court litigation or tribunals
3. ✅ Confidentiality of proceedings
4. ✅ Custom selection of expert arbitrators (e.g., engineers in infrastructure disputes)
5. ✅ Supports cooperative federalism by avoiding prolonged court battles

🔹 Challenges and Limitations

1. ❌ Consent Requirement: Arbitration can proceed only if all parties agree.
2. ❌ Jurisdictional Conflicts: Overlap with Article 131 may invalidate arbitral awards.
3. ❌ Enforceability Doubts: Constitutional law overrides private agreements.
4. ❌ Lack of Precedents: Few instances of interstate arbitration in India.

🔹 Suggested Reforms & Way Forward

To strengthen interstate arbitration in India, the following steps can be considered:

• 📌 Legislative clarity: Parliament may consider enacting a special law for inter-state arbitration, similar to the Inter-State River Water Disputes Act.
• 📌 Model arbitration clause: A standard clause for MoUs/contracts between states can be developed.
• 📌 Role of NITI Aayog or Inter-State Council: These bodies can act as neutral arbitral institutions for states.
• 📌 Training & sensitisation: Bureaucrats and legal officers in states need training in ADR and arbitration law.

🔹 Conclusion

While inter-state disputes involving constitutional rights are to be adjudicated by the Supreme Court or through special tribunals (in case of water), arbitration has a definite role in contractual or commercial disputes between states. As India embraces ease of doing business and cooperative federalism, arbitration could serve as an effective tool for resolving inter-state disagreements efficiently and amicably.

It is time for the Indian legal and policy framework to recognise and promote structured inter-state arbitration for a more collaborative and development-focused governance model.