Supreme Court Allows Counterclaim in Arbitration Despite Contractual Dispute Resolution Clause: National Highway Authority of India vs. Transstroy (India) Limited (2022) INSC 603 (11 July 2022)

Date of the Judgment: 11 July 2022
Citation: (2022) INSC 603
Judges: M.R. Shah, J. and Sanjiv Khanna, J.
Can a party be barred from filing a counterclaim in arbitration if they haven’t followed a pre-arbitration conciliation process, even if the main dispute is already under arbitration? The Supreme Court of India addressed this question in a case between the National Highway Authority of India (NHAI) and Transstroy (India) Limited. The court held that a counterclaim should be allowed as it arises from the same core dispute and promotes efficiency. The judgment was authored by Justice M.R. Shah, with Justice Sanjiv Khanna concurring.

Case Background

The National Highway Authority of India (NHAI) and Transstroy (India) Limited entered into an Engineering Procurement and Construction (EPC) Agreement on November 13, 2014, for a highway project in Tamil Nadu. NHAI issued a cure period notice on September 29, 2015, citing breaches by Transstroy. Following Transstroy’s failure to rectify the issues, NHAI issued a notice of intention to terminate the contract on April 12, 2016, and subsequently terminated the contract on July 22, 2016. The termination notice stated that NHAI reserved its right to claim damages.

Transstroy initiated arbitration on February 9, 2017, after an unsuccessful attempt at amicable settlement, nominating its arbitrator. NHAI nominated its arbitrator on March 10, 2017, and the Arbitral Tribunal was constituted. Transstroy filed its Statement of Claim on May 15, 2017. NHAI filed its Statement of Defence on July 11, 2017, reserving its right to file a separate counterclaim.

Timeline

Course of Proceedings

The Arbitral Tribunal rejected NHAI’s request for an extension of time to file a counterclaim. Subsequently, the Tribunal rejected NHAI’s application to place the counterclaim on record, stating that the dispute was outside the scope of the arbitration agreement because NHAI did not follow the pre-arbitration conciliation procedure under Clauses 26.1 and 26.2 of the contract.

NHAI challenged this decision before the High Court of Delhi under Section 34 of the Arbitration and Conciliation Act, 1996. The High Court treated the proceedings as an appeal under Section 37(2) of the Act and upheld the Arbitral Tribunal’s decision, dismissing NHAI’s petition. NHAI then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of Clause 26 of the EPC Agreement and Section 23 of the Arbitration and Conciliation Act, 1996.

Clause 26 of the contract outlines the dispute resolution process:

• 26.1.1: Any dispute, difference or controversy of whatever nature howsoever arising under or out of or in relation to this Agreement (including its interpretation) between the Parties, and so notified in writing by either Party to the other Party (the “Dispute”) shall, in the first instance, be attempted to be resolved amicably in accordance with the conciliation procedure set forth in Clause 26.2.
• 26.2: In the event of any Dispute between the Parties, either Party may call upon the Authority’s Engineer, or such other person as the Parties may mutually agree upon (the “Conciliator”) to mediate and assist the Parties in arriving at an amicable settlement thereof. Failing mediation by the Conciliator or without the intervention of the Conciliator, either Party may require such Dispute to be referred to the Chairman of the Authority and the Chairman of the Board of Directors of the Contractor for amicable settlement…
• 26.3: Any Dispute, which is not resolved amicably as provided in clause 26.1 & 26.2 shall be finally settled by arbitration as set forth below…

Section 23 of the Arbitration and Conciliation Act, 1996, as amended in 2016, deals with statements of claim and defence:

• (2A) The respondent, in support of his case, may also submit a counter-claim or plead a set-off, which shall be adjudicated upon by the arbitral tribunal, if such counter-claim or set-off falls within the scope of the arbitration agreement.

The Supreme Court had to determine whether the pre-arbitration conciliation process under Clause 26 was a mandatory prerequisite for a counterclaim, and whether Section 23(2A) allowed a counterclaim even if the conciliation process was not followed for the counterclaim itself.

Arguments

NHAI’s Arguments:

• NHAI argued that its counterclaim arose from the same termination notice that led to Transstroy’s claim. Therefore, the core dispute was the termination itself, and the counterclaim was intrinsically linked.
• NHAI contended that Clause 26 of the contract could be invoked by either party for any dispute. The term “dispute” should be interpreted broadly to include both claims and counterclaims.
• NHAI submitted that it had reserved its right to claim damages in the termination notice and in its Statement of Defence.
• NHAI argued that requiring a separate conciliation process for the counterclaim would be redundant, as the core dispute was already under arbitration.
• NHAI emphasized that Section 23(2A) of the Arbitration Act, 1996, was meant to ensure that counterclaims are adjudicated in the same arbitration to avoid multiplicity of proceedings.
• NHAI relied on the Law Commission of India’s Report No. 246, which recommended amendments to Section 23 to allow counterclaims without requiring a separate reference.

Transstroy’s Arguments:

• Transstroy argued that Clause 26 of the contract mandated a two-step process: (1) notification of a dispute and (2) an attempt at amicable settlement before invoking arbitration.
• Transstroy contended that the term “dispute” in Clause 26.1.1 was specifically defined as a dispute “notified in writing” by either party. NHAI had not notified its counterclaim as a separate dispute.
• Transstroy argued that the reservation of rights by NHAI did not exempt it from following the mandatory conciliation process.
• Transstroy stated that Section 23(2A) of the Arbitration Act, 1996, allowed counterclaims only if they fell within the scope of the arbitration agreement, which, in this case, required prior conciliation.
• Transstroy relied on the principle that parties must adhere to the contractually agreed mechanisms for dispute resolution.

Submissions Table

Innovativeness of the argument: NHAI’s argument was innovative in emphasizing the purpose of Section 23(2A) of the Arbitration Act, 1996, to consolidate disputes and avoid multiplicity of proceedings.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

✓ Whether in the facts and circumstances of the case, the High Court as well as the Arbitral Tribunal have committed any error in rejecting the application submitted by NHAI under Section 23(2A) of the Arbitration Act, 1996 not permitting the NHAI to take on record the counter claim?

Treatment of the Issue by the Court

Authorities

Cases Cited by the Court:

• Gujarat State Cooperative Land Development Bank Ltd. Vs. P.R. Mankad and Ors., (1979) 3 SCC 123 – The Supreme Court of India, to interpret the meaning of the word ‘dispute’.
• Major (Retd.) Inder Singh Rekhi VS. Delhi Development Authority, (1988) 2 SCC 338 – The Supreme Court of India, to interpret the meaning of the word ‘dispute’.
• State of Goa Vs. Praveen Enterprises, (2012) 12 SCC 581 – The Supreme Court of India, regarding the interpretation of arbitration clauses.
• Bharat Petroleum Corporation Limited Vs. Go Airlines (India) Limited, (2019) 10 SCC 250 – The Supreme Court of India, regarding the interpretation of arbitration clauses.
• Silpi Industries Etc. Vs. Kerala State Road Transport Corporation and Anr., 2021 SCC Online SC 439 – The Supreme Court of India, regarding the interpretation of arbitration clauses.
• Kolkata Metropolitan Development Authority Vs. Hindustan Construction Co. Ltd., 2017 SCC OnLine Cal 18978 – The Calcutta High Court, regarding the interpretation of arbitration clauses.
• M.K. Shah Engineers & Contractors Vs. State of MP. (1999) 2 SCC 594 – The Supreme Court of India, regarding pre-arbitral requirements.
• Nirman Sindia v. Indal Electromelts Ltd., Coimbatore 1999 SCC OnLine Ker 149 – The Kerala High Court, regarding the mandatory nature of pre-arbitral procedures.

Legal Provisions Considered by the Court:

• Section 23 of the Arbitration and Conciliation Act, 1996 – Regarding statements of claim and defense, including counterclaims.
• Clause 26 of the EPC Agreement – Regarding dispute resolution through conciliation and arbitration.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Gujarat State Cooperative Land Development Bank Ltd. Vs. P.R. Mankad and Ors., (1979) 3 SCC 123 and Major (Retd.) Inder Singh Rekhi VS. Delhi Development Authority, (1988) 2 SCC 338 to interpret the meaning of the word “dispute” broadly, including both claims and counterclaims.
• The Court relied on State of Goa Vs. Praveen Enterprises, (2012) 12 SCC 581, Bharat Petroleum Corporation Limited Vs. Go Airlines (India) Limited, (2019) 10 SCC 250, and Silpi Industries Etc. Vs. Kerala State Road Transport Corporation and Anr., 2021 SCC Online SC 439 for the interpretation of arbitration clauses and to emphasize the need for a pragmatic approach.
• The Court distinguished M.K. Shah Engineers & Contractors Vs. State of MP. (1999) 2 SCC 594 and Nirman Sindia v. Indal Electromelts Ltd., Coimbatore 1999 SCC OnLine Ker 149, stating that while pre-arbitral requirements are important, they should not be interpreted to defeat the purpose of Section 23(2A) of the Arbitration Act, 1996.
• The Court considered the decision of the Calcutta High Court in Kolkata Metropolitan Development Authority Vs. Hindustan Construction Co. Ltd., 2017 SCC OnLine Cal 18978 to support its interpretation of arbitration clauses in a similar context.

The Supreme Court held that the Arbitral Tribunal and the High Court erred in rejecting NHAI’s counterclaim. The Court emphasized that the core dispute was the termination of the contract, and the counterclaim was a natural consequence of that termination. The Court interpreted Clause 26 of the contract pragmatically, stating that it was intended to facilitate amicable settlement but not to prevent a party from raising a counterclaim in arbitration when the main dispute was already under arbitration.

The Court highlighted that Section 23(2A) of the Arbitration Act, 1996, was specifically inserted to allow counterclaims to be adjudicated in the same arbitration, avoiding multiplicity of proceedings. The Court noted that the NHAI had reserved its right to claim damages from the beginning and had sought to file the counterclaim promptly.

The Supreme Court stated that the Arbitral Tribunal’s narrow interpretation of Clause 26 had taken away the valuable right of NHAI to submit a counterclaim, which was of a significant amount. This interpretation went against the statutory and contractual rights of NHAI.

The Court concluded that the High Court should have recognized that allowing the counterclaim would avoid multiplicity of proceedings, and the High Court’s narrow interpretation of Clause 26 was erroneous.

The Court allowed NHAI’s appeal, set aside the orders of the Arbitral Tribunal and High Court, and permitted NHAI to file its counterclaim. The Court also directed that the period between July 18, 2017, and July 11, 2022, be excluded for computing the period for passing the award under Section 29A of the Arbitration Act, 1996.

“In the facts and circumstances of the case, by such a narrow interpretation, the Arbitral Tribunal has taken away the valuable right of the NHAI to submit counter claim, which is of a very huge amount thereby negotiating the statutory and contractual rights of the NHAI and paving way for a piecemeal and inchoate adjudication.”

“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.”

“Clauses 26.1 and 26.2 have to be interpreted in a pragmatic and practical manner, as they require that the parties must at first try to settle, resolve and even try conciliation but when the procedure under Clauses 26.1 and 26.2 fails to yield desired result, in the form of settlement within the period specified in Clause 26.2, the Dispute can be resolved through arbitration in terms of Clause 26.3.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure efficiency in dispute resolution and to avoid multiplicity of proceedings. The Court emphasized that the counterclaim arose from the same core dispute as the main claim (i.e., the termination of the contract) and that a narrow interpretation of the pre-arbitration conciliation clause would defeat the purpose of Section 23(2A) of the Arbitration Act, 1996. The Court also considered the fact that NHAI had reserved its right to claim damages and had promptly sought to file the counterclaim. The Court was also swayed by the fact that the Arbitral Tribunal’s narrow interpretation was detrimental to the rights of NHAI.

Sentiment Analysis of Reasons

Fact:Law Ratio

Key Takeaways

• A pre-arbitration conciliation clause should not be interpreted to prevent a party from raising a counterclaim in arbitration when the main dispute is already under arbitration.
• Section 23(2A) of the Arbitration Act, 1996, is meant to ensure that counterclaims are adjudicated in the same arbitration, avoiding multiplicity of proceedings.
• Parties should adopt a pragmatic approach to dispute resolution, focusing on efficiency and avoiding unnecessary procedural hurdles.
• This judgment clarifies that the term “dispute” should be interpreted broadly to include both claims and counterclaims.
• The reservation of rights by a party to claim damages is a valid expression of intent and cannot be ignored.

Directions

The Supreme Court directed the Arbitral Tribunal to consider the counterclaim filed by NHAI along with the Statement of Claim submitted by Transstroy and the Statement of Defence of claim submitted by NHAI on its own merits. The Court also directed that the period between July 18, 2017, and July 11, 2022, be excluded for computing the period for passing the award under Section 29A of the Arbitration Act, 1996.

Development of Law

The ratio decidendi of this case is that a pre-arbitration conciliation clause should not be interpreted to prevent a party from raising a counterclaim in arbitration when the main dispute is already under arbitration. This judgment clarifies that the term “dispute” should be interpreted broadly to include both claims and counterclaims, and it re-emphasizes the purpose of Section 23(2A) of the Arbitration Act, 1996, which is to avoid multiplicity of proceedings. This decision does not change the previous position of law but provides a more pragmatic and efficient interpretation of arbitration clauses.

Conclusion

The Supreme Court’s judgment in National Highway Authority of India vs. Transstroy (India) Limited allows the National Highway Authority of India to file a counterclaim in arbitration, even though it did not follow the pre-arbitration conciliation process for the counterclaim itself. The Court emphasized that the core dispute was the termination of the contract, and the counterclaim was intrinsically linked to it. This decision promotes efficiency in dispute resolution and avoids multiplicity of proceedings, clarifying the interpretation of pre-arbitration conciliation clauses and Section 23(2A) of the Arbitration Act, 1996.