NHAI can file counterclaim in arbitration without separate conciliation: SC

NHAI terminated a road contract. The contractor went to arbitration. NHAI tried to file a counterclaim for damages. The tribunal said: 'You skipped a step.' The Supreme Court just reversed that.

The Arbitral Tribunal had shut the door — and locked it. NHAI's counterclaim, the tribunal ruled, could not be heard because the highway authority had not first walked through the contract's mandatory pre-arbitration conciliation process. For the counterclaim alone. The Delhi High Court agreed. NHAI appealed. In July 2022, a two-judge bench of the Supreme Court — Justice M.R. Shah and Justice Sanjiv Khanna — asked a question that cuts to the bone of every infrastructure dispute in India.

When a contractor challenges a termination, and the government wants to claim damages for that same termination, must the government restart the entire dispute resolution process from scratch — or can it simply file a counterclaim in the arbitration that is already underway?

November 2014 — the contract that turned

NHAI signed an EPC (engineering, procurement, and construction) contract with Transstroy (India) Limited. The job: upgrade a highway section in Tamil Nadu. The contract was standard government fare: timelines, performance, termination, and a multi-tiered dispute resolution mechanism. The pages of the agreement, signed on November 13, 2014, felt crisp and official — a document that would later become the centre of a legal battle.

Things went wrong. Transstroy, according to NHAI, failed to meet its obligations. NHAI issued a cure notice — a formal warning giving the contractor a chance to fix the breach. The letter, typed on official letterhead, listed the defaults with clinical precision. It did not work. On July 22, 2016, NHAI issued a termination notice. The notice explicitly reserved NHAI's right to claim damages.

Transstroy did not accept the termination. The contractor invoked the arbitration clause, challenging the validity of the termination itself. A three-member Arbitral Tribunal was constituted. The tribunal room was quiet, the air thick with the smell of old files and the weight of the dispute.

Two days — that was all it took

NHAI filed its Statement of Defence — its formal response to Transstroy's claims — before the tribunal. Within two days, NHAI sought to file a counterclaim for damages arising from the same termination. The counterclaim was filed under Section 23(2A) of the Arbitration and Conciliation Act, 1996 (the provision that allows a respondent to file a counterclaim or set-off in the same arbitration).

The Arbitral Tribunal refused to accept it. The tribunal's reasoning: Clause 26 of the contract required parties to go through a pre-arbitration conciliation process before any dispute could be referred to arbitration. NHAI had not done that for its counterclaim. Therefore, the counterclaim fell outside the scope of the arbitration agreement. The tribunal's order, dated September 15, 2017, was brief and firm — a single sheet of paper that closed the door on NHAI's damages claim.

NHAI challenged this refusal before the Delhi High Court under Section 37(2) of the Arbitration Act (which allows appeals against certain orders of an arbitral tribunal). The High Court dismissed the petition. It agreed with the tribunal. The courtroom in Delhi was crowded, the judges' bench raised and imposing, but the judgment offered no relief.

A claim is not a dispute — the court's distinction

The Supreme Court allowed NHAI's appeal on July 11, 2022. The bench's reasoning turned on a fundamental distinction that the tribunal and the High Court had missed: the difference between a 'claim' and a 'dispute'.

A claim, the court said, can be one-sided. One party says: "You owe me money." That is a claim. But a dispute, by its very nature, has two sides. When Transstroy challenged the termination, the termination itself became the dispute. Everything that flowed from that termination — including NHAI's right to claim damages — was part of the same dispute.

The court held that where an arbitration arises from a particular dispute (here, termination of contract) and the counterclaim also arises from the same dispute or cause of action, requiring a separate pre-arbitral conciliation process for the counterclaim would be an exercise in futility and is not mandated by the dispute resolution clause. The Supreme Court bench sat in a semicircle, the judges' robes dark against the wood-panelled walls, as the judgment was read out.

The court also pointed to Section 23(2A) of the Arbitration Act. That provision entitles a respondent to file a counterclaim or set-off so long as it falls within the scope of the arbitration agreement. Since both the claim and the counterclaim arose from the same contractual dispute — the termination — the counterclaim was squarely within the scope of the arbitration agreement. The court noted that there is a distinction between 'claim' which may be one-sided and 'dispute' which by definition has two sides. Once a dispute is notified and referred to arbitration, the entire subject matter including counterclaims and set-offs forms part of the arbitration.

The nightmare of parallel proceedings

The Supreme Court was also concerned with practical consequences. If NHAI had been forced to start a separate arbitration for its counterclaim, two tribunals would have been hearing two sides of the same dispute. One tribunal would decide whether the termination was valid. Another would decide what damages NHAI could claim from that same termination. The result: wasted time, contradictory findings, and the very multiplicity of proceedings that arbitration is supposed to avoid.

The court observed that refusing to entertain a counterclaim arising from the same dispute would lead to parallel proceedings before various fora, defeating the object and purpose of Section 23(2A) and of efficient dispute resolution. The court also noted that the contract's pre-arbitration conciliation clauses — Clauses 26.1 and 26.2 — were designed to filter disputes before they reached arbitration. But once a dispute had already passed through that filter and was before a tribunal, requiring a second pass through the same filter for a counterclaim made no sense. The dispute was already in the room.

The court cited several precedents to support its reasoning. In Gujarat State Cooperative Land Development Bank Ltd. v. P.R. Mankad and Ors. — (1979) 3 SCC 123, the principle that procedural requirements must not defeat substantive justice was established. In Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority — (1988) 2 SCC 338, the court had held that arbitration clauses must be construed broadly. In State of Goa v. Praveen Enterprises — (2012) 12 SCC 581, the Supreme Court had clarified that counterclaims arising from the same contract are within the scope of arbitration. In Bharat Petroleum Corporation Limited v. Go Airlines (India) Limited — (2019) 10 SCC 250, the court had emphasised that Section 23(2A) must be given full effect. In Silpi Industries Etc. v. Kerala State Road Transport Corporation and Anr. — 2021 SCC Online SC 439, the court had reiterated that counterclaims are part of the same dispute. The court also referred to Kolkata Metropolitan Development Authority v. Hindustan Construction Co. Ltd. — 2017 SCC OnLine Cal 18978, M.K. Shah Engineers & Contractors v. State of MP — (1999) 2 SCC 594, and Nirman Sindia v. Indal Electromelts Ltd., Coimbatore — 1999 SCC OnLine Ker 149, for the proposition that procedural technicalities should not obstruct the resolution of disputes on merits.

What the court ordered

The Supreme Court quashed the Arbitral Tribunal's order dated September 15, 2017, and the Delhi High Court's judgment. It allowed NHAI's application to file the counterclaim. The tribunal was directed to consider the counterclaim along with the Statement of Claim and Statement of Defence on merits. The operative order was clear and final — the counterclaim was back in the game.

The court also excluded the period between July 18, 2017, and July 11, 2022 — the time consumed by this procedural battle — from the time limit for passing the arbitral award under Section 29A of the Arbitration Act (which sets a deadline for completing arbitration proceedings). No order as to costs was made.

Every infrastructure contract — the lesson

For practitioners, the takeaway is straightforward. When a dispute arises from a specific event — a termination, a default, a payment failure — and that dispute is already in arbitration, any counterclaim that arises from the same event can be filed directly in that arbitration. No need to restart the pre-arbitration process. No need to file a separate arbitration notice.

The distinction between a 'claim' and a 'dispute' is now the key. A claim is what one party asserts. A dispute is what happens when the other party pushes back. Once a dispute exists and is referred to arbitration, the entire subject matter — including counterclaims and set-offs — forms part of that arbitration. The contract document, with its typed clauses and official seals, had already set the stage — the Supreme Court simply ensured that both sides could play their parts.

The court also clarified that Section 23(2A) of the Arbitration Act, 1996 entitles a respondent to file a counterclaim or set-off so long as it falls within the scope of the arbitration agreement. Where both the claim and counterclaim arise from the same contractual dispute already validly referred to arbitration, the counterclaim falls within the scope of the arbitration agreement. This principle applies regardless of whether the pre-arbitration conciliation process was followed for the counterclaim separately.

The judgment also addressed the practical concern of multiplicity of proceedings. Refusing to entertain a counterclaim arising from the same dispute would lead to parallel proceedings before various fora, defeating the object and purpose of Section 23(2A) and of efficient dispute resolution. The court's reasoning was grounded in the reality of infrastructure disputes — where time is money, and every procedural hurdle adds to the cost.

For government agencies like NHAI, the judgment provides clarity. When a contractor challenges a termination, the government can file its counterclaim for damages in the same arbitration without being forced to restart the pre-arbitration conciliation process. This saves time, reduces costs, and ensures that all aspects of the same dispute are resolved in one forum.

For contractors, the message is equally clear. Once you challenge a termination, you open the door to all counterclaims arising from that same termination. The dispute is a single package, and both sides get to present their case.

THE PLAY: If your counterclaim arises from the same contractual dispute already in arbitration, file it under Section 23(2A) — do not let the tribunal or the other side force you back to pre-arbitration conciliation.

The court ended where it began: with a termination, a counterclaim, and the simple principle that a dispute, once opened, stays open for both sides. The Supreme Court bench rose, the judges' robes rustling, and the case was closed — but the principle it established will resonate through every infrastructure arbitration in India.