Rejecting counter-claim or set-off may lead to parallel proceedings before various fora and offend the very purpose S. 23 of Arbitration Act: SC  

Supreme Court: The Division Bench of M.R. Shah* and Sanjiv Khanna, JJ., reversed concurrent findings of the Arbitral Tribunal and the Delhi High Court rejecting the National Highway Authority of India’s (NHAI) application to file a counter-claim in a commercial dispute. The Court held, 

“When there is a provision for filing the counter-claim – set off, which is expressly inserted in Section 23 of the Arbitration Act, 1996, there is no reason for curtailing the right of the appellant for making the counter-claim or set off. If we do not allow the counter-claim made by the NHAI in the proceedings arising out of the claims made by the Contractor, it may lead to parallel proceedings before various fora.” 

Continuous Breach of Contract and Its Subsequent Termination  

NHAI and the respondent-contractor entered into an Engineering Procurement and Construction (EPC) Agreement (hereinafter “the Contract”) in respect of the improvement/augmentation of two laning with paved shoulders of National Highway 210 under National Highways Development Project (NHDP) PHASE-III.  

According to NHAI, the Contractor was in continuous breach of specific obligations under the Contract for which a cure period notice was issued calling upon the Contractor to cure the defaults within 60 days. When the Contractor failed to cure the defects pointed, a notice of intention to terminate the Contract was issued. Having found the Contractor’s reply totally unsatisfactory, the NHAI issued a termination notice under Clause 23.1.2 of the Contract.  

Commencement of Arbitration 

Aggrieved by the untimely termination of the contract, the Contractor invoked the arbitration clause. NHAI joined the arbitration and after two days of filing the Statement of Defence, it sent a letter to the Arbitral Tribunal seeking extension of time for filing the counter-claim which was rejected by the Tribunal, essentially on the ground that the procedure under Clauses 26.1 and 26.2 of the contract had not been followed by the NHAI and therefore, the counter-claim was beyond the scope of the arbitration agreement and adjudication of the said dispute was beyond the jurisdiction of the Tribunal.  

Particularly, the Tribunal held that the counter-claim was a dispute which needed to be first amicably settled by way of conciliation as mandated by Clause 26 and, only then it could be taken to arbitration.  

To challenge the aforementioned order, NHAI preferred the appeal under Section 34 of the Arbitration Act, 1996 before the Delhi High Court. The High Court dismissed the appeal and confirmed the order passed by the Arbitral Tribunal. 

Contentions of the Parties 

NHAI submitted that both in the termination notice as well as in the Statement of Defence, it had reserved its right to claim damages and stated that it would file its counter-claim separately. Hence, it could not be said that claim was raised by surprise or by way of counterblast. Further, the counter-claim was not a separate ‘dispute’ but rather a ‘claim’ and Clause 26 does not contemplate repeated invocation of the same procedure when there is an overlapping cause of action. 

Contesting the stand taken by NHAI, the contractor contended that mere reservation of rights would not entitle either party to bypass the contractually agreed mechanism under Clause 26. Since the EPC Contract does not contemplate parties raising claims by directly resorting to arbitration without going through the steps set out in Clause 26; i.e., Step 1: Notification of Disputes and Step 2: Resolution by amicable settlement.  

Factual Analysis  

Whether Counter Claim was a separate dispute?  

Under the contract, both the parties are given the opportunity to resolve the dispute amicably through conciliation, and thereafter the “Dispute”, which is not resolved shall have to be finally settled by arbitration. Noting that the cause of dispute was the termination of the contract by the NHAI, the Court stated,  

It may be true that in a given case, the “Dispute” may include the claims and/or counter-claims, but, at the same time, the main dispute can be said to be termination of the contract, which as observed hereinabove was required to be resolved through conciliation after following the procedure as above.”  

Hence, opining that NHAI’s request to file counter-claim was a “claim” and not a “dispute”, the Court held that both the Arbitral Tribunal as well as the High Court had failed to appreciate the difference between the expressions “claim”, which may be made by one side and “Dispute”, which by its definition has two sides.  

Whether NHAI bypassed the agreed procedure?  

The Court noted that from the very beginning, the NHAI reserved its right to claim damages, and even in the Statement of Defence, it claimed such a set off of Rs.1.23 crores and also specifically stated it reserved its right to file the counter-claim. Further, there was no delay at all on the part of the NHAI initially praying for an extension of time to file the counter-claim and/or thereafter to file the application under Section 23(2A) permitting it to place on record the counter-claim.  

The Court ruled that once it was established that the counter-claim was a “claim” and not a “dispute” there was no requirement to follow the procedure mentioned under Clause 26, much less a question to bypass the procedure. The Court said,  

“Once any dispute, difference or controversy is notified under Clause 26.1, the entire subject matter including counter-claim/set off would form subject matter of arbitration as ‘any dispute which is not resolved in Clauses 26.1 and 26.2’.” 

Therefore, the Court opined that not permitting the NHAI to file the counter-claim would defeat the object and purpose of permitting to file the counter-claim/set off as provided under Section 28 23(2A) of the Arbitration Act, 1996. 

Findings and Conclusion 

In the light of the above, the Court held that by such a narrow interpretation, the Arbitral Tribunal had taken away the valuable right of the NHAI to submit counter-claim; thereby negotiating the statutory and contractual rights of the NHAI and paving way for a piecemeal and inchoate adjudication. Similarly, the High Court had seriously erred by making a narrow interpretation of Clause 26 while confirming the order passed by the Arbitral Tribunal. 

Consequently, the Arbitral Tribunal order and the impugned judgment of the High Court were quashed and set aside. NHAI’s application to file the counter-claim was allowed. Additionally, the Court directed the time spent in litigation (the period between 18-07-2017 till 11-07-2022) be excluded from computing the period of the passing of the award under Section 29A of the Arbitration Act, 1996.  

[National Highway Authority of India v. Transstroy (India) Ltd., 2022 SCC OnLine SC 832, decided on 11-07-2022]  


*Judgment by: Justice M. R. Shah  

Appearance by:  

For NHAI: ASG Madhavi Diwan 

For the Contractor: Senior Advocate Nakul Dewan 


Kamini Sharma, Editorial Assistant has put this report together 

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.