Failure To Frame Counter Claim As An Additional Issue When It Forms Part Of Pleadings Is Patently Illegal: Delhi High Court

Facts

The present petition was filed under section 34, ACA seeking setting aside of the Arbitral Award dated 18.06.2010 wherein the claims of the respondent were allowed to the tune of Rs. 34,71,073 less Rs. 1,20,000/- as penalty, along with 9% interest per annum.

The parties had entered into an agreement for supply and replacement of critical spares and commissioning of a turbine unit at IP Station. As there were disputes between the parties, the Respondent invoked the arbitration process and consequently, the learned Sole Arbitrator was appointed. The Respondent filed its Statement of Claim (“SOC”).

The Petitioner is in its reply dated 13.03.2008 denied all the claims made by the Respondent and stated that the Respondent had committed a breach of contract by causing 33 days delay coupled with the fact that the condition to impose penalty was mentioned in the contract dated 23.03.2004, thus the Petitioner was justified in deducting the said amount from the invoices. Additionally, because of delay of 33 days, Unit No.2 could not become operational in its generating capacity to the tune of 50 MW. Consequently, the Petitioner suffered due to non-functioning of Unit No.2, which resulted in loss of generation of electricity and the loss incurred by the Petitioner was estimated at Rs. 11,88,00,000/-.

After hearing both the parties and considering the evidence placed on record, the Sole Arbitrator vide the Arbitral Award dated 18.06.2010, allowed the claim of the Respondent to the tune of Rs. 34, 71, 073 less 1,20,000 as penalty along with interest at 9% p.a. Aggrieved by the said Award, the Petitioner preferred the present petition.

Contentions

The Counsel for the Petitioner stated that the impugned Award was challenged primarily on the grounds that the same was patently illegal and prejudicial to the rights of the Petitioner to adduce evidence and prove its counter claim. The Counsel for the Petitioner submitted that the Petitioner in the reply to SOC had specifically pleaded that because of the delay of 33 days on the part of the Respondent, the Petitioner suffered a loss of generation of electricity which was quantified at Rs. 11,88,00,000/- which was claimed as an actual loss suffered by the Petitioner.

He further submitted that during the 14^th hearing held on 13.02.2009, the proposed issue, i.e. the aforesaid counter claim was rejected by the learned Sole Arbitrator. The refusal to frame counter claim as an additional issue is patently illegal in view of the fact that the factual foundation of the counter was pleaded by the Petitioner in its Reply to SOC. The Counsel contended that the Sole Arbitrator failed to appreciate that the Reply to SOC, itself contained the counter claim which is one of the three judicially recognized modes of setting up a counterclaim and that the Arbitrator erred on facts and in law by stating that there was no prayer for the counter claim in the Reply of the Petitioner.

Lastly, the Counsel submitted that once the Arbitrator refused to frame counter claim as an additional issue, the Petitioner could not lead evidence and prove its case in respect of the counter claim, despite the counter claim being addressed in its pleadings.

Per Contra, the Counsel for the Respondent contended that the Petitioner had never during the course of the proceedings raised a counter claim except for making bald averments. There was no formal prayer or relief was sought from the Arbitrator in respect of the pleading raised in the Reply and also no separate fees of the Arbitrator for adjudication of the counter claim was paid. Hence, the argument of the Petitioner is meritless.

Additionally, the Counsel for the Respondent further submitted that the order dated 13.02.2009 passed by the Sole Arbitrator not framing an issue of the counter claim was never challenged by the Petitioner throughout the proceedings. Lastly, he stated that even on facts, the counter claim of the Petitioner was not made out.

Observations

Carrying out a factual analysis, the Court observed that the Petitioner not only made a counter claim of Rs. 11.88 crores before the Arbitrator but also gave the basis for its calculations for arriving at the said figure. Even the Respondent in its rejoinder categorically denied the said claim.

The Court referred to Section 23, ACA holding that the provision entitles a respondent to file a counter claim, however the said provision does not set out any fixed format for filing counter claim. And in the instant case, the Respondent was categorically aware of the counter claim of the Petitioner and had expressly denied it in its Rejoinder.

The Court observed that once there was counter claim of the Petitioner in its pleading and the Petitioner had 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 had denied the claim of the petitioner, it was incumbent upon the Sole Arbitrator to frame an issue in this regard and to that extent the order dated 13.02.2022 passed by the Sole Arbitrator is erroneous.

The Court noted that the basis of framing issues is the averments of disputed facts or law borne out of the pleading. Hence, once the reasons/basis for a counter claim, the amount and computation of the counter claim had been made in the Reply, it does not matter if there is no specific prayer in the prayer clause. The pleadings were to be read as a whole and not in bits and pieces. The Court also highlighted the difficulty of the Petitioner in challenging the order at an earlier stage as non-framing of issue in respect of a counter is not appealable under Section 37, ACA nor is an interim Award to be challenged under Section 34, ACA.

As to the issue of the Petitioner not leading any evidence for its counter claim, the Court observed that once the counterclaim was not an issue before the Sole Arbitrator, the Petitioner could not be expected to lead evidence on the same as the parties are required to lead evidence on the questions which have been framed for the determination by the Arbitrator.

The Court concluded that the impugned Arbitral Award is in conflict with the fundamental policy of Indian Law. In addition, the said Award suffers from violation of most basic notions of justice. The Petitioner not being allowed to pursue its claim. Shocked the conscience of the Court.

Accordingly, the Petition was allowed and the impugned Arbitral Award was set aside.

Case Title – Indraprastha Power Generation Co Ltd. v EM Services P Ltd.

Case No. – O.M.P 717/2010

Appearance-

For Petitioner- Mr. S. Wasim A. Qadri, Sr. Adv. with Mr. R.K. Vats, Mr. Saeed Qadri, Mr. Danis Ali, Advs.

For Respondent - Mr. Hrishikesh Chaitaley, Adv.

Date – 13.08.2025

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