Counter-Claim Cannot Be Rejected Merely Because The Claims Thereunder Were Not Notified At The Pre-Arbitral Stage: Supreme Court

The Division Bench of Justice M.R. Shah and Justice Sanjiv Khanna held that there is a difference between the word "Claim" and "Dispute" where the former may be a one-sided thing while the latter by its definition has two sides. It observed that once the conciliation failed, the entire gamut including the counter-claim/set off would form the subject matter of arbitration.

Facts

The parties entered into an Engineering Procurement and Construction Agreement dated 13.11.2014 whereby the Transstroy (Respondent) agreed to carry out improvement/augmentation of a National Highway in the State of Tamil Nadu.

As per NHAI (Appellant), the respondent was in continuous breach of the agreement which resulted in the issuance of a cure period notice calling upon the respondents to cure the defects within 60 days. Thereafter, the appellant issued a notice of intention to terminate the agreement under Clause 23.1.2 of the agreement.

Thereafter, the appellant issued a notice of termination of the agreement. The appellant in its notice expressly stated that this is without prejudice to its right to claim damages. Aggrieved by the decision of the appellant, the respondent invoked the dispute resolution mechanism under Clause 26 of the Agreement for amicable settlement of the dispute. On failure of the settlement between the parties, the respondent invoked the arbitration mechanism and nominated its arbitrator. Accordingly, the tribunal was constituted.

The respondent filed its SOC on 15.05.2017 and the appellant filed its SOD on 11.07.2017 wherein it again retreated its right to claim damages and stated that it would prefer a counter-claim. Thereafter, the appellant sent a letter to the arbitral tribunal seeking extension of time for filing its counter-claim. However, the request was rejected by the tribunal.

Thereafter, the appellant moved an application under Section 23(2A) of the A&C Act to place its counter-claim on record. The tribunal rejected the counter-claim of the appellant on the ground that in terms of Clause 26, the claims were to be notified and an attempt at amicable settlement was to be made before invocation of arbitration and the appellant did not specify its claims at that stage.

Aggrieved by the decision of the tribunal, the appellant preferred an appeal before the High Court of Delhi. The Court also dismissed the appeal on the same ground. Thereafter, the appellant preferred an SLP against the impugned order.

The Contention of the Parties

The appellant challenged the order of the High Court on the following grounds:

• The cause of action for both the claim and counter-claim arose out of the same facts i.e., termination of the agreement, therefore, there was no reason for hair-splitting the dispute between the parties and the same would lead to multiplicity of proceedings.
• The word dispute under Clause 26 is two sided, it includes the right of the appellant to file the counter-claim.
• Both the parties could invoke Clause 26, therefore, after the respondent has invoked it, there was no reason for the appellant to re-invoke it as it would lead to duplication of the very same process for which the arbitration is already pending.
• The cause of action is common, therefore, it would be a travesty of the process to only allow the claim of the petitioner.
• The appellant had specifically reserved its right, both under the notice of termination and SOD, to claim damages from the respondent, therefore, the contention that the counter-claim was a counterblast is without any merit.
• The procedural provisions cannot be interpreted in a hyper-technical manner contrary to the letter and spirit of Arbitration Act.
• Section 23(2A) explicitly recognizes the right of the appellant to file counter-claim, therefore, the decision of the tribunal and of the Court is against its mandate.

The respondent vehemently opposed the petition on the following grounds:

• The petitioner has not complied with the mandatory requirement of an attempt at amicable settlement of dispute qua its claims.
• Clause 26 required the appellant to notify and crystalize its claims before taking recourse to arbitration, the respondent having failed to do so cannot maintain a counter-claim in the same arbitration.
• Clause 26 is three-step procedure for resolution of dispute. The first step is notification of disputes, which requires the parties to notify their respective claims, then the second stage is an attempt at mediation and if the second stage fails, the parties are referred to arbitration which is the third and the final stage.
• The petitioner has not complied with the first two conditions, therefore, it cannot directly raise its claims before the arbitrator.
• The word dispute under Clause 26 only refers to the disputes that are notified and arbitration can only be qua those disputes.
• The pre-arbitral requirement of notification and mediation is an essential requirement that cannot be bypassed.
• The Courts are to give effect to the contractual bargain between the parties and that the clause should not be widely construed but given its ordinary meaning.
• The appellant did not notify its claim as provided under Clause 26, therefore, it has waived its right to file a counter-claim in the reference raised by the contractor.
• The counter-claim in terms of Section 23(2A) can only be filed in respect of the claims that are within the scope of arbitration agreement, therefore, no counter-claim could be filed in respect of non-notified claims as they are outside the ambit of arbitration clause.

Analysis By The Court

The Court held that the main dispute between the parties was the termination of the agreement by the appellant, therefore, the reference to conciliation was regarding the termination of the agreement not any particular claim or counter-claim.

The Court referred to various letters and notice of arbitration issued by the respondent to arrive at the finding that the respondent had referred to the termination of the agreement as the dispute between the parties. Therefore, it could not object to the counter-claim of the appellant which arose out of the same termination of the agreement.

The Court held that on a true and fair interpretation of Clause 26, every claim that arose out of the termination of the agreement could be referred to arbitration and not just the claims of the respondent could be entertained.

The Court held that there is a difference between the word "Claim" and "Dispute" where the former may be a one-sided thing while the latter by its definition has two sides. It observed that once the conciliation failed, the entire gamut including the counter-claim/set off would form the subject matter of arbitration.

The Court further held that the appellant had from the very beginning reserved its right to claim the damages from the respondent.

The Court held that the arbitral tribunal has given a very narrow interpretation to the arbitration clause, thereby, has taken away the valuable right of the appellant to submit counter-claim and paving the way for piecemeal and inchoate adjudication.

The Court held that if the appellant is not allowed to file its counter-claim in the arbitration proceedings initiated by the respondent, the same would result in parallel proceedings before various fora.

Accordingly, the Court set aside the impugned judgement and the order of the tribunal and allowed the appellant to file its counter-claim.

Case Title: NHAI v. Transstroy (India) Limited, Civil Appeal No. 6732 of 2021

Citation : 2022 LiveLaw (SC)  586

Date: 11.07.2022

Counsel for the Appellant: Ms. Madhavi Diwan, ASG.

Counsel for the Respondent: Mr. Nakul Dewan, Senior Advocate.

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