NHAI can file counter claim without separate conciliation, says SC

The highway authority terminated the contractor. The contractor went to arbitration. Then the authority wanted to claim damages too—but the tribunal said: you didn't conciliate first.

In July 2016, NHAI ended a contract with Transstroy (India) Limited for road work on NH-210 in Tamil Nadu. The contractor had failed its obligations repeatedly, NHAI said. Cure notices—typed, signed, each one a formal warning—had been issued. The source does not specify a precise number, but the file, now thick with these paper trails, contained the termination letter dated July 2016 that reserved NHAI's right to claim damages for delays and breaches.

Transstroy invoked arbitration — the private dispute resolution process where a neutral third party decides the outcome. It challenged the termination itself. NHAI filed its defence. It also filed a counter claim: a demand for the damages it had reserved. The Arbitral Tribunal refused to accept it. The reason? NHAI had not followed the pre-arbitration conciliation procedure for its own counter claim.

When the tribunal said no

The three-member Arbitral Tribunal, constituted in September 2017, held that NHAI's counter claim fell outside the arbitration agreement. Under Clause 26 of the EPC contract — the detailed agreement between the parties — any dispute had to first go through conciliation (a structured attempt to settle with a neutral facilitator) before arbitration. NHAI had not independently notified its damages claim under Clause 26.1.1. It had not attempted conciliation under Clause 26.2. The tribunal said the counter claim was barred. In the tribunal room, the presiding member set the file aside; the table was bare except for the contract and the parties' submissions. The only other object was a stack of papers—the Statement of Claim and the Statement of Defence—that lay untouched.

NHAI challenged this before the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 — the provision that allows a party to ask a court to set aside an arbitral order. The High Court dismissed the petition. A counter claim is a separate dispute, the court reasoned, and must independently satisfy the pre-arbitral conciliation requirement.

NHAI appealed to the Supreme Court.

The question that divided the courts

The core legal question was simple: when a contractor challenges a termination in arbitration, can the highway authority file a counter claim for damages from that same termination — without separately conciliating first?

The Arbitral Tribunal and the High Court said no. Their reasoning was procedural: the contract required conciliation before arbitration for every dispute. A counter claim was a separate dispute. It needed its own conciliation attempt.

NHAI argued this was impractical. The termination was a single event. The contractor's claim — that the termination was wrongful — and the authority's counter claim — that the termination was justified and damages were due — were two sides of the same coin. They arose from the same dispute. The contractor had already triggered conciliation when it challenged the termination. The authority's counter claim was simply the other half.

Transstroy defended the tribunal's order. The contract was clear, it argued. Clause 26 required conciliation before arbitration for every claim. NHAI had not conciliated its damages claim. The counter claim was inadmissible.

Why the Supreme Court reversed

The Supreme Court bench — Justice M.R. Shah and Justice Sanjiv Khanna — allowed NHAI's appeal in July 2022. The courtroom fell silent as the judgment was read. Justice Shah adjusted his spectacles and read the operative order; the only sound was the rustle of paper as the court's copy of the contract was turned. The court held that the term 'Dispute' under the contract was two-sided. It encompassed both claims and counter claims from the same transaction. Once the contractor had notified the termination dispute under Clause 26.1 and attempted conciliation under Clause 26.2, the entire subject matter — including any counter claim or set-off (a claim that reduces the amount owed) — was already within the scope of the arbitration agreement.

The court explicitly stated: "The term 'Dispute' is two-sided and encompasses both claims and counter claims arising from the same transaction."

The court relied on Section 23(2A) of the Arbitration Act, introduced by the 2015 amendment. This provision explicitly permits a respondent to file a counter claim or set-off before the Arbitral Tribunal, so long as it falls within the scope of the arbitration agreement. Not permitting such counter claims would defeat the statutory purpose and lead to multiplicity of proceedings — the very thing arbitration is meant to avoid.

The judgment cited a series of precedents. In State of Goa v. Praveen Enterprises — (2012) 12 SCC 581 — the Supreme Court had held that a counter claim from the same contract could be raised in arbitration even if the claimant had not included it in the original notice. In Bharat Petroleum Corporation Limited v. Go Airlines (India) Limited — (2019) 10 SCC 250 — the court had clarified that the scope of arbitration is determined by the arbitration agreement, not by the claimant's notice alone. The court also drew on 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 — for principles on the scope of disputes. Other cited authorities included Silpi Industries v. Kerala State Road Transport Corporation — 2021 SCC Online SC 439 — Kolkata Metropolitan Development Authority v. Hindustan Construction Co. Ltd. — 2017 SCC OnLine Cal 18978 — M.K. Shah Engineers & Contractors v. State of M.P. — (1999) 2 SCC 594 — and Nirman Sindia v. Indal Electromelts Ltd., Coimbatore — 1999 SCC OnLine Ker 149. Each supported the proposition that counter claims arising from the same transaction should not be procedurally barred.

Pre-arbitral conciliation clauses must be interpreted pragmatically, the court said. Once any dispute is notified under Clause 26.1, the entire subject matter — including counter claims and set-offs — forms the subject matter of arbitration. Requiring a separate conciliation attempt for every counter claim would be wasteful, time-consuming, and contrary to the legislative intent behind Section 23(2A).

What the court ordered

The Supreme Court quashed the Arbitral Tribunal's order dated September 15, 2017, and the Delhi High Court's judgment that had upheld it. NHAI was permitted to file its counter claim. The Arbitral Tribunal was directed to consider it alongside the Statement of Claim and Statement of Defence. The court also excluded the period between July 18, 2017 and July 11, 2022 — the entire time the procedural battle had lasted — from the time limit for completing the arbitration under Section 29A (the provision that sets a deadline for the arbitral award). The file, once closed, was now reopened. The three-inch stack of papers that had been set aside would now be read.

No order was made as to costs.

Why this matters for every arbitration

For practitioners, this judgment resolves a recurring procedural trap. Parties who receive a notice of arbitration often have their own claims against the claimant — damages for delays, defects, or breaches. Before this judgment, a cautious reading of pre-arbitral conciliation clauses suggested that every claim, including counter claims, needed its own conciliation attempt. That reading is now incorrect.

The practical takeaway: if the underlying dispute — the core event that triggered the arbitration — has already been through conciliation, any counter claim arising from that same dispute can be filed directly before the Arbitral Tribunal. No separate conciliation is required.

THE PLAY: When you receive a notice of arbitration, check whether the underlying dispute has already been conciliated — if it has, file your counter claim directly under Section 23(2A) without a separate conciliation attempt.

The highway authority terminated the contractor. The contractor went to arbitration. This time, the authority's damages claim came along for the ride.