Failure To Frame Counter Claim Despite Pleadings Is Patently Illegal | Delhi High Court Says Refusal “Shocks The Conscience Of The Court”
Sanchayita Lahkar
The High Court of Delhi Single Bench of Justice Jasmeet Singh set aside an arbitral award dated 18 June 2010, holding that the award was in conflict with the fundamental policy of Indian law and in violation of the most basic notions of justice. The Court observed that the arbitral tribunal’s refusal to frame an issue on the counter claim, despite specific pleadings by the petitioner and denial by the respondent, deprived the petitioner of the opportunity to lead evidence and seek adjudication on its counter claim. The Court concluded that the refusal “shocks the conscience of the Court” and consequently annulled the award. The petition under Section 34 of the Arbitration and Conciliation Act, 1996 was allowed.
The matter arose from a contractual dispute concerning the supply and replacement of critical spares and commissioning at a 62.5 MW GE USA make Turbine of Unit No. 2 at I.P. Station. The petitioner, a public sector undertaking engaged in the business of power generation, had floated a tender for the said work on 30 January 2004. The respondent company, engaged in the supply of spares and maintenance of power equipment, submitted its offer on 17 February 2004. Following negotiations, a Letter of Intent was issued to the respondent on 23 March 2004 for supply and commissioning of the turbine spares at a total value of Rs. 83,20,000.
As per the terms, the respondent was to supply spares as listed in Annexure A of the order, and replace the supplied spares free of cost to exhibit its capability and develop future business. During the dismantling of the turbine, blades and nozzle blades of several stages were found severely damaged. It was mutually decided to replace these with new sets, repair nozzle blocks, and rebuild diaphragms. The respondent completed the work on 31 May 2004, and the unit was synchronized on 1 June 2004, after a delay of 33 days.
The disputes arose when the respondent raised claims for Rs. 46,40,821, consisting of outstanding invoices and interest. The petitioner, in its reply dated 13 March 2008, denied the claims and alleged breach of contract due to the 33-day delay. It asserted that the delay resulted in a loss of electricity generation amounting to Rs. 11,88,00,000. The respondent invoked arbitration, and the sole arbitrator allowed claims of Rs. 34,71,073 less Rs. 1,20,000 as penalty, along with 9% interest per annum, through an award dated 18 June 2010.
Aggrieved, the petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, on grounds of patent illegality, violation of principles of natural justice, and deprivation of the right to lead evidence on its counter claim.
On behalf of the petitioner, it was argued that the arbitrator refused to frame an issue regarding the counter claim despite specific pleadings in its reply. The petitioner contended that this refusal foreclosed its right to prove its case of actual loss suffered. Reliance was placed on Union of India v. Tata Teleservices (Maharashtra) Ltd., (2007) 7 SCC 517, where the Supreme Court held that even if a counter claim was vague, the tribunal could grant opportunity to remove deficiencies in pleadings. The petitioner further argued that the arbitrator’s order dated 13 February 2009, refusing to frame the counter claim issue, effectively prevented it from leading evidence.
The respondent argued that the petitioner had not raised a proper counter claim, as there was no formal prayer or payment of separate fees. It contended that the arbitrator’s refusal to frame such an issue had never been challenged by the petitioner during the arbitration proceedings. Further, it submitted that the arbitrator found no documentary evidence substantiating the petitioner’s claim of loss due to delay and that the findings were based on reasoned assessment.
The Court noted that the pleadings of the petitioner had specifically set out a counter claim of Rs. 11.88 crores, which was categorically denied by the respondent in its rejoinder. It was therefore evident that both parties were aware of the counter claim and had joined issue on it. The refusal to frame an issue was found erroneous, as every disputed fact raised in pleadings and denied by the other party is required to be adjudicated as an issue.
Justice Jasmeet Singh recorded that the scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996 is limited, and the Court does not sit in appeal or review the arbitral award. The Court observed: “The scope under section 34 of the 1996 Act is very limited and narrow as the Court does not sit in appeal over the Award or review the Award passed by the Arbitral Tribunal nor re-appreciate the evidence.” The Court further observed that an award can only be set aside if it falls within the grounds enumerated in Section 34, including being in conflict with the fundamental policy of Indian law or most basic notions of morality or justice.
Referring to OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions (India) (P) Ltd., the Court recorded: “To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country.”
The Court then examined the arbitrator’s order dated 13 February 2009, which stated: “The respondent has additionally proposed an issue for counter claim. However since there is no prayer as such for the counter claim except an averment in the reply, the issue cannot be framed.” The Court found this reasoning erroneous since the petitioner had made a specific counter claim in its pleadings and the respondent had categorically denied it in the rejoinder. Justice Singh recorded: “Once there is counter claim of the petitioner in its pleading and the petitioner has spelt out the reasons as well as has given basis for arriving at a figure of counter-claim and moreover, the respondent in its rejoinder has denied the claim of the petitioner, it was incumbent upon the learned Sole Arbitrator to frame an issue in this regard.”
The Court stated that pleadings are to be read as a whole and not in fragments: “Hence, once the reasons/basis for a counter claim, the amount and computation of the counter claim have been made in the reply, it does not matter if there is no specific prayer in the prayer clause. Pleadings are to be read as a whole and not in bits and pieces.”
The Court also referred to Union of India v. Tata Teleservices (Maharashtra) Ltd., stating: “Even if there is some vagueness in the counterclaim, as felt by tdsat, we think that tdsat might have directed the appellant before us, to make its counterclaim more specific and in a proper manner. After all, a defect of deficiency could be permitted to be cured.”
Rejecting the respondent’s argument that the arbitrator had nonetheless considered the counter claim, the Court recorded: “Once the counter-claim was not an issue before the learned Sole Arbitrator, the petitioner could not be expected to lead evidence on the same and obviously there would be no evidence before the learned Sole Arbitrator in support of its counter claim.”
Justice Singh concluded: “For the foregoing reasons, the Arbitral Award dated 18.06.2010 is in conflict with the fundamental policy of Indian Law. In addition, the said Award suffers from violation of most basic notions of justice despite specific pleading, no issue of counter claim was framed by the learned Sole Arbitrator. Since there was no issue, the petitioner did not lead any evidence. Hence, the petitioner was clearly deprived of the adjudication of its claim and the same shocks the conscience of the Court.”
The Court allowed the petition and set aside the arbitral award dated 18 June 2010. Justice Jasmeet Singh directed: “Accordingly, the petition is allowed and the Arbitral Award dated 18.06.2010 is set aside.” The Court held that the award suffered from conflict with fundamental policy of Indian law and violation of most basic notions of justice due to denial of adjudication on the petitioner’s counter claim. No further directions were issued, and the petition stood disposed of.
Advocates Representing the Parties
For the Petitioners: Mr. S. Wasim A. Qadri, Senior Advocate with Mr. R.K. Vats, Mr. Saeed Qadri, Mr. Danis Ali, Advocates
For the Respondents: Mr. Hrishikesh Chaitaley, Advocate
Case Title: Indraprastha Power Generation Co. Ltd. v. E.M. Services (I) Pvt. Ltd.
Neutral Citation: 2025: DHC:6836
Case Number: O.M.P. 717/2010
Bench: Justice Jasmeet Singh
