NHAI's counterclaim allowed without fresh conciliation

NHAI terminated the contract. The contractor rushed to arbitration. Then NHAI tried to file a counterclaim — but the tribunal said: 'You skipped a step.'

The highway widening project in Tamil Nadu had already fallen apart. Cure notices — physical documents with the weight of a final warning — had been sent. The contractor had allegedly failed to perform. In July 2016, the National Highway Authority of India (NHAI) pulled the plug on the contract. What followed was a procedural tangle that would take five years and three courts to untangle — and it all turned on one question: did NHAI need to go through a separate round of conciliation before it could file a counterclaim for damages?

When the contractor struck first

Transstroy (India) Limited had been hired under an EPC (engineering, procurement, and construction) contract to widen a national highway. When NHAI terminated the agreement under Clause 23.1.2 — reserving its rights to claim damages — the contractor did what any aggrieved party would do: it invoked the arbitration clause under Clause 26.3. But the contract had a mandatory pre-arbitration step — conciliation under Clauses 26.1 and 26.2. Transstroy went through that process, failed to settle, and then moved to arbitration.

NHAI filed its Statement of Defence, reserving its right to claim damages. Two days later, on 18 July 2017, it sought to file a counterclaim under Section 23(2A) of the Arbitration and Conciliation Act, 1996 (the provision that allows a party to raise a counterclaim or set-off in the same arbitration proceeding, without starting a fresh case).

The three-member Arbitral Tribunal refused. In the tribunal room, the typed order sheet — still warm from the printer — was handed to counsel. The order was read out with crisp finality. Its reasoning was simple: NHAI had not independently followed the conciliation procedure for its own claim. The contractor had gone through conciliation before arbitration. NHAI had not. So, the tribunal said, the counterclaim fell outside the scope of the arbitration agreement.

The High Court agrees — and the trap tightens

NHAI challenged the tribunal's order before the Delhi High Court under Section 37(2) of the Act (which allows appeals against certain orders of an arbitral tribunal). The High Court upheld the tribunal's decision. The logic seemed airtight: the contract required conciliation before arbitration. NHAI had not conciliated its own claim. Therefore, the counterclaim could not proceed.

But the High Court had missed something. And the Supreme Court was about to point it out.

What the Supreme Court saw differently

The bench of Justice M.R. Shah and Justice Sanjiv Khanna reversed both the tribunal and the High Court. The courtroom fell silent. Justice Shah adjusted his glasses before reading the judgment. The key lay in how the contract defined a "Dispute." Under Clause 26.1.1 of the contract, a "Dispute" was not a one-sided claim. It was, by definition, a two-sided thing — a disagreement that encompassed both what Party A said and what Party B said in response.

When Transstroy notified its dispute over the termination, that notification covered the entire subject matter of the termination — including any claims NHAI might have arising from the same event. The conciliation that followed was about that dispute, not about one party's version of it.

The court held that requiring NHAI to go through a separate round of conciliation for its counterclaim would be "hyper-technical." The core dispute — the termination — had already been through the conciliation process. The counterclaim arose from the same termination. No second round was needed.

The court's ratio was clear: where the core dispute — the termination of contract — has already been notified and processed through the contractual pre-arbitral conciliation mechanism under Clauses 26.1 and 26.2, a counterclaim arising from the same dispute need not independently go through the same conciliation procedure.

Why Section 23(2A) mattered

The Supreme Court also relied on Section 23(2A) of the Arbitration Act, which was inserted to ensure that counterclaims and set-offs could be adjudicated in the same arbitration without requiring a separate reference. The court said that denying a counterclaim on procedural grounds defeated the very purpose of this provision — which was to avoid multiplicity of proceedings and to let the tribunal decide everything arising from the same transaction in one go.

The court drew a material distinction between a "claim" (one-sided) and a "Dispute" (two-sided by nature). When a dispute is notified under a dispute resolution clause, the entire subject matter — including counterclaims and set-offs arising from the same transaction — forms part of that dispute. No separate notification is required for each side's version of events.

The Supreme Court further observed that Section 23(2A) was inserted to ensure that counterclaims and set-offs can be adjudicated by an arbitral tribunal without requiring a separate or new reference, so long as the counterclaim falls within the scope of the arbitration agreement. Denying a counterclaim on hyper-technical procedural grounds, the court held, defeats this statutory purpose.

The precedents that guided the court

The Supreme Court relied on a line of cases that had already established the principle that counterclaims arising from the same transaction do not need a separate reference. In State of Goa v. Praveen Enterprises (2012), the court had held that a counterclaim could be raised even if the party had not independently invoked arbitration. In Bharat Petroleum Corporation Limited v. Go Airlines (India) Limited (2019), the court had reiterated that once a dispute is referred to arbitration, both claims and counterclaims arising from that dispute are within the tribunal's jurisdiction.

The court also cited Gujarat State Cooperative Land Development Bank Ltd. v. P.R. Mankad (1979) and Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority (1988) for the proposition that procedural requirements should not be interpreted in a manner that defeats the substantive rights of parties. Additional precedents like Silpi Industries v. Kerala State Road Transport Corporation (2021), M.K. Shah Engineers & Contractors v. State of MP (1999), and Kolkata Metropolitan Development Authority v. Hindustan Construction Co. Ltd. (2017) were also considered, reinforcing that counterclaims arising from the same transaction fall within the tribunal's jurisdiction.

What this means for your next contract dispute

For practitioners, the takeaway is straightforward. When you receive a notice of dispute from the other side, do not assume that only the notifying party's claims are on the table. If the dispute arises from a termination, a breach, or a failure to perform, your counterclaim for damages is part of the same dispute — and you do not need to restart the pre-arbitration machinery to bring it.

The court's reasoning also carries a warning for tribunals. A hyper-technical reading of pre-arbitration clauses can lead to wasted time and costs. The Supreme Court's message was clear: look at the substance of the dispute, not just the form. If the core issue has been conciliated, everything that flows from it — on both sides — is in play.

This judgment also has implications for how parties draft dispute resolution clauses. If you want counterclaims to require a separate conciliation process, the clause must say so explicitly. The default position, after this judgment, is that one round of conciliation covers the entire dispute — claims and counterclaims alike.

For contractors, the lesson is different. When you invoke arbitration after a termination, you are opening the door to the other side's claims as well. Your notice of dispute is not a one-way street. The counterclaim that the other side files may be larger than your own claim — and you cannot block it by arguing that they skipped a step.

THE PLAY: When the other side notifies a dispute and goes through conciliation, file your counterclaim in the same arbitration — the conciliation covered both sides of the dispute, not just theirs.

The operative order was read out with finality: "The order passed by the Arbitral Tribunal dated 15.09.2017 and the impugned judgment and order passed by the High Court are quashed and set aside. NHAI is permitted to file the counter claim." The period between 18 July 2017 and 11 July 2022 was excluded from the time limit for passing the award under Section 29A. No costs were awarded.

The court ended where it began: with a termination, a dispute, and a counterclaim that was always part of the same fight.