In the case of National Highway Authority of India v. Transstroy (India) Limited, Civil Appeal No. 6732 of 2021, decided on 11.07.2022, the Supreme Court held that the Counterclaim of a party cannot be rejected by the Arbitral Tribunal solely due to the reason that it was not notified at the time of referring the dispute to Arbitration.
The National Highway Authority of India (hereinafter referred to as “the Appellant“) and Transstroy (India) Ltd. (hereinafter referred to as “the Respondent“) entered into an Engineering, Procurement and Construction Agreement (hereinafter referred to as “the Contract“) for the execution of certain improvement/augmentation work on the National Highway No. 210.
As per the Appellant, the Respondent continually breached its obligations under the Contract for which a Cure Period Notice was issued by the Appellant to the Respondent pursuant to terms of the Contract, to cure the defaults within 60 days. The Respondent failed to cure the defaults and the Appellant first issued a Notice of intention to terminate the Contract, and subsequently a Termination Notice.
Thereafter, the Respondent first requested to refer the dispute for amicable settlement as per the Contract, and then sought to invoke the Arbitration Clause of the Contract. Resultantly, both the parties nominated the Arbitrators, and accordingly, the Arbitral Tribunal was constituted.
Upon commencement of Arbitration, the Respondent filed its Statement of Claim which was followed by the Appellant’s Statement of Defense. The Appellant had reserved its right to claim damages in the Termination Notice and the Statement of Defense, and thus sought to file the Counterclaim separately.
When the Appellant sought extension of time for filing the Counterclaim, the Tribunal rejected the request stating that no application was moved by the Appellant before the Tribunal for filing the Counterclaim. The Appellant subsequently moved an application under Section 23(2A) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act“) to place its counterclaim on record.
The Tribunal again rejected the said application as the Appellant had not followed the procedure outlined in the Contract, making the Counterclaim outside the purview of the Arbitration Clause and beyond the Arbitral Tribunal’s jurisdiction.
Aggrieved by the order of the Arbitral Tribunal rejecting the application, the Appellant preferred an appeal under Section 34 of the Act before the Delhi High Court. The High Court rejected the aforementioned application and upheld the Arbitral Tribunal’s decision to reject the Appellant’s request to record its Counterclaim as an Order passed under Section 16(2) of the Act.
Thereafter, the Appellant preferred the present appeal before the Supreme Court aggrieved by the order of the High Court.
ISSUE BEFORE THE SUPREME COURT
Whether the High Court and the Arbitral Tribunal erred in rejecting the Appellant’s application under Section 23(2A) of the Act by not allowing the Appellant to file the Counterclaim?
CONTENTIONS OF THE PARTIES
The Appellant contended that by upholding the Arbitral Tribunal’s decision and not taking on record the Appellant’s Counterclaim, the High Court made a grave/serious error. The Appellant submitted that the Arbitral Tribunal and the High Court failed to appreciate that the Counterclaim arose out of common/overlapping cause of action.
The Appellant argued that the Respondent’s request for Arbitration stemmed directly from the Termination Notice sent by the Appellant. Therefore, the dispute between the parties could not be hair split, as it would lead to unnecessary multiplicity of the proceedings where the evidence is also common with the dispute arising out of same transaction.
The Appellant noted that the Arbitration Clause of the Contract could be invoked by either party, as ‘a dispute’ by its very definition is two sided. For the interpretation of the term “dispute”, the Appellant relied upon the Supreme Court’s decisions in Gujarat State Cooperative Land Development Bank Ltd. v. P.R. Mankad and Ors., (1979) 3 SCC 123 and Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338.
The Appellant further submitted that the Arbitral Tribunal and the High Court failed to appreciate the distinction between the terms “claim”, which may be made by one side, and “dispute”, which by its definition has two sides. Thus, there can be no question of duplication of very same process which has been invoked previously and resulted in the initiation of Arbitral proceedings.
The Appellant argued that the Appellant terminated the Contract only after giving the Respondent ample opportunity to fix the defaults. The Appellant expressly reserved the right to claim damages in the Termination Notice itself, which is a natural consequence of termination occurring due to non-fulfilment of contractual obligations. Therefore, the Respondent’s contention that the Counterclaim came as a surprise or as a counterblast is entirely untrue.
The Appellant contended that it did not forego the procedure agreed between the parties by submitting the Counterclaim, as the agreed procedure was already complied with by the Respondent and the Arbitration Clause did not require the repeated invocation of same procedure for the same cause of action.
The Appellant submitted that the very object and purpose of Section 23(2A) of the Act has been overlooked, which enables the parties to file the entirety of their Claim/Counterclaim before the Arbitral Tribunal as per their convenience. In this regard, the Appellant relied upon the Supreme Court’s decisions in State of Goa v. Praveen Enterprises, (2012) 12 SCC 581; Bharat Petroleum Corporation Limited v. Go Airlines (India) Limited, (2019) 10 SCC 250; Silpi Industries Etc. v. Kerala State Road Transport Corporation and Anr., 2021 SCC Online SC 439 and the Calcutta High Court’s decision in Kolkata Metropolitan Development Authority v. Hindustan Construction Co. Ltd., 2017 SCC OnLine Cal 18978.
The Respondent contended that before the Arbitration is invoked, a two-step process is to be followed as per the Contract, which involves Notification of Disputes as the first step, and Resolution by amicable settlement as the second step. The dispute can be referred to Arbitration only when the parties fail to resolve the dispute amicably.
The Respondent argued that a pre-Arbitral requirement is a crucial component of the Arbitration Clause, as held by the Supreme Court in M.K. Shah Engineers & Contractors v. State of MP (1999) 2 SCC 594.
The Respondent further relied upon the Kerala High Court’s decision in Nirman Sindia v. Indal Electromelts Ltd., Coimbatore 1999 SCC Online Ker 149, wherein it was held that “when the parties to a contract agree to any special mode for resolution of the disputes arising out of the agreement and they are bound to comply with the mode prescribed under the agreement. Without resorting to the first step provided for the resolution of the dispute in the agreement they cannot jump to the second step or to the final step to settle the disputes between the parties“.
The Respondent submitted that pre-conditions to Arbitration laid down in the Arbitration Clause providing for dispute resolution through mediation or negotiations are mandatory and enforceable in nature, and have been held to be enforceable internationally. As the Arbitration Clause of the Contract is mandatory in nature, a Counterclaim cannot be allowed in a manner contrary to the contractual mechanism.
The Respondent argued that the Appellant, by not notifying its claims even after the Respondent sought to refer the disputes to Arbitration, waived off its right to invoke Arbitration for its Counterclaims.
The Respondent contended that the parties chose to refer to Arbitration only those disputes notified by one party to the other and which could not be resolved amicably under the Contract. Thus, a reference to Arbitration without following the mandatory pre-conditions under the Contract would fall outside the scope of Arbitration agreement as provided in Section 23(2A) of the Act and beyond the jurisdiction of the Tribunal.
DECISION AND FINDINGS
The Supreme Court perused the Arbitration Clause of the Contract and noted that the cause for dispute between the parties was termination of the Contract by the Appellant, and as the dispute could not be resolved amicably, the Arbitration proceedings are maintainable and not restricted only to the Claim or Counterclaim of the Respondent.
The Supreme Court accepted the submission of the Appellant that the High Court and the Arbitral Tribunal failed to appreciate the distinction between the terms “claim,” which can be made by one side and “dispute” which by definition has two sides.
The Supreme Court opined that due to the narrow interpretation of the Arbitration Clause by the Arbitral Tribunal and High Court, the valuable right of the Appellant to submit a Counterclaim was taken away.
The Supreme Court held that when Section 23 of the Act expressly provided for filing of Counterclaim, there was no reason to curtail the right of the Appellant to make the Counterclaim which would lead to parallel proceedings before various fora. Not allowing the Appellant to file the Counterclaim would defeat the object and purpose of Section 23(2A) of the Act.
The Supreme Court observed that the pre-condition of amicable settlement for the dispute was already invoked by the Respondent, which would include the entire subject matter including the Counterclaim. Thus, the Supreme Court held that the Arbitral Tribunal and the High Court erred in rejecting the application under Section 34 and 37 of the Act.
Thus, the Supreme Court quashed and set aside the High Court’s order and allowed the Appellant to file the Counterclaim.
The Supreme Court, in the present case, emphasized upon the fundamental objective of the Act, which is to provide for speedy resolution of disputes without the involvement of multiple judicial fora. The Supreme Court highlighted that when parties to an Arbitration agreement are permitted to file Counterclaim pursuant to Section 23(2A) of the Act, the Arbitral Tribunal or the High Court cannot take away such right merely due to a narrow interpretation of the Arbitration Clause.
In the presence of a specific provision in the Act granting a party a right to file its Counterclaim, neither the Tribunal nor any other judicial authority can curtail such right of a party, in consonance with the legal maxim Ubi Jus Ibi Remedium, i.e., where there is a Right, there is a Remedy. Thus, this decision of the Supreme Court is a step forward in ensuring a pro-Arbitration environment in India protecting either party’s right to refer a dispute to Arbitration.
–Team AMLEGALS, assisted by Ms. Komal Soni (Intern)
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