In a recent decision, the Delhi High Court held that notice under Section 21 of the Arbitration and Conciliation Act is not required if a claim is filed as a counterclaim for which reference has already been made by the court.
In the captioned case, the Appellant being ASF Insignia SEZ Private Ltd. (“AISPL”), engaged in real estate and construction, had entered into a work contract with Shapoorji Pallonji and Company Private Ltd. (“SPCPL”). This contract was later amended through a Tripartite Novation Agreement, replacing AISPL with M/s Black Canyon SEZ Private Ltd. (“BCSPL”) in all responsibilities and obligations. Furthermore, AISPL issued a Letter of Comfort, ensuring payment by BCSPL if they defaulted under the Work Contract. Due to delays, BCSPL and SPCPL agreed to foreclose the Work Contract, leading to a Settlement Agreement, which didn’t include AISPL as a party.
Thereafter, AISPL received a demand notice from SPCPL under Section 8 of Insolvency and Bankruptcy Code, 2016 demanding payment from AISPL by mischaracterizing AISPL as a Corporate Guarantor based on the Letter of Comfort. NCLT dismissed SPCPL’s application against AISPL stating that AISPL could not be treated as a Corporate Guarantor but despite NCLT’s order, SPCPL issued notice for invocation of arbitration.
Furthermore, Section 14 petition was filed by BCSPL, seeking termination of the mandate of the Sole Arbitrator on the grounds that he had become de jure incapable of performing his functions in respect of the arbitral proceedings arising out of the Works Contract, the Novation Agreement, and the Settlement Agreement. SPCPL filed its Statement of Defence (“SoD”) but did not file Counter Claim and instead filed a Statement of Claim (“SoC”) naming BCSPL, AISPL and ASF Buildtech Private Ltd. (“ABPL”) as Respondents without due permission from the ld. Sole Arbitrator. In response, BCSPL filed an application under Section 16 contending that SPCPL has forfeited or failed to file its counterclaim and that arbitrator does not have jurisdiction to decide the SoC presented by SPCPL, which was dismissed by the Arbitrator via Order dated 23rd May, 2023. Thus, formal noticed on the SoC of SPCPL were issued to the two other Respondents, AISPL and ABPL, to appear before the ld. Arbitral Tribunal and file their respective SoDs within six weeks. After which both AISPL and ABPL filed their respective applications under Section 16 challenging the authority of the ld. Sole Arbitrator which was rejected by the Arbitrator vide Order dated 17th October, 2023.
The arbitrator had also bifurcated the arbitral proceedings by Order dated 7th July, 2023 into two cases:
Thereafter, a batch of two appeals under Section 37(2) of the Arbitration and Conciliation Act, 1996, along with a petition under Section 14 of the Act, was filed, seeking to set aside the orders dated 23.05.2023 and 17.10.2023 issued by the Sole Arbitrator.
In its analysis, the Hon’ble Delhi Court noted that AISPL and BCSPL, are entities within the ASF group, were under the same management. The Court observed that SPCPL's filing of a separate SoC instead of a counterclaim was unconventional but permissible under the circumstances. Further, the Court set aside the delineation of cases 1 and 2 and stated that for all practical purposes, the case pending before the Sole Arbitrator is to be treated as one case arising out of reference order dated 22-07-2022.
The Delhi High Court concluded that no separate notice under Section 21 of the Arbitration and Conciliation Act was required if the claim was filed as a counterclaim. The Court upheld the Arbitrator's decisions and rejected the termination of the Arbitrator's mandate. The Court also affirmed that the claims against AISPL and ABPL were maintainable under the Group of Companies doctrine to avoid multiplicity of proceedings and ensure consistent findings.