This article is written by Advocate Devshree Dangi. It deals with the provisions enumerated under Section 23 of the Arbitration and Conciliation Act, 1996. It explains in detail the scope of Section 23 with the help of various Supreme Court judgements. It comprehensively analyses the principles laid down in various landmark judgements of the Supreme Court in the context of the process under Section 23 regarding statements of claim and defence. 

Introduction

Arbitration in India is admired for being comparatively faster than the courts and yet, it may not lessen one’s feeling of being in a legal maze. In India, arbitration is governed by the Arbitration and Conciliation Act, 1996. Section 23 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Section”) forms the foundation of the process, where even the manner of having and presenting claims as well as defences are spelt out to the last detail.  This Section goes down to details as far as it should, for each case, that is for the party that brings the case to the Arbitral Tribunal or files the claim (the claimant) to know how to build the case and for the party that is being sued or defended against the claim (the respondent) to also know how to defend the case. In addition to describing the steps, Section 23 of the Act also presents deadlines for statements’ submission and enables the Arbitral Tribunal to regulate the changes or modifications to the claims and the defences as the process unfolds. 

Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act 1996 (hereinafter referred to as “the Act”) is one of the primary pieces of legislation that governs the framework for arbitration in India.  It helps with arbitration—a process that is faster and more often less widely known than traditional legal lengthy disposals—by providing the framework for the process. 

The Act covers various aspects of arbitration, including:

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  • Formation of arbitration agreements: Outlines how two parties can agree on how to form a consensus with regard to an issue that has a clause on arbitration. 
  • Appointment of arbitrators: All of the above mentioned standards also set out guidelines in regard to the appointment of neutral arbitrators for the arbitration process. 
  • Conduct of arbitration: Outlining the time and manner of filing claims as well as handling hearings and making decisions or recommending on other claims. 
  • Enforcement of awards: Explains how an award that is issued by an arbitrator can be made, enforced and executed to be like an order made by a judge. 
  • The Act also provides for conciliation, which is another method of dealing with or disposing of disputes where one or more persons who are not parties to the dispute facilitate the parties’ search for a mutually acceptable solution. 

Therefore, for streamlining and providing fair means for the resolution of disputes in India, the importance of the Arbitration and Conciliation Act cannot be undermined. 

Understanding Section 23 of Arbitration and Conciliation Act, 1996

Section 23 of the Act is one of the most important provisions, which essentially paves the way for putting forth arguments during arbitration in India. Let’s delve deeper into each clause and explore the specific terms used:

Submitting the claims and defences: Section 23(1)

The claimant for filing the arbitration is bound to file a statement containing the foundation of the claim, the nature of issues in the case, and the type of relief or remedy sought by the claimant. It must be remembered that the respondent has to come up with a defence to counter such particulars. This must be done within a time frame that is consented to by the parties or within a time frame set by the Arbitral Tribunal. However, where the parties have specifically agreed otherwise on the content of these elements in the respective statements, such other arrangements prevail, as the main principle on which arbitration stands is ‘party autonomy’.

Explanation

The legal rule created in this clause first sets out the bare procedural requirements necessary in arbitration between the parties. Such pleadings consist of the facts of the case and must show, as precisely as possible, what issues are at stake and what the claimant wants as the remedy for the situation. This gives a definition of the kind of arbitration that has to be done, which gives a clue to the boundaries of the arbitration. The respondent then has to deny or explain the issues raised by the claimant in relation to the issues mentioned. These submissions need to be made at a time as agreed between the two parties or, where they cannot agree, at a time that is set by the Arbitral Tribunal. Furthermore, the clause is open to interpretation, enabling the parties to determine the adequate details required in the statements given the nature of the dispute.

Submission of relevant documents: Section 23(2)

The parties may include all documents in the claim that they consider appropriate in their statements. They may refer to the documents or any other evidence that they plan to produce at a later date in the procedure.

Explanation 

This clause relates to the admissibility of evidence in the arbitration process. Parties can attach copies of documents as soon as they file their initial statements, which means the supporting documentation is included as soon as the party makes its claim or presents a defence or an excuse. Any documents that will be used in the case may also be admissible, such as contracts, letters, financial statements and others that are relevant. In addition to objections, parties can also stipulate admission for documents or other items to be introduced later into evidence. This flexibility is especially useful in cases where it may take time to compile all the necessary papers. Thus, by permitting references to other evidence in the future, the clause ensures that the parties can submit some initial batch of evidence without having to wait for compilation.

Counterclaims and set-offs by the respondent: Section 23(2A)

The respondent may file a defence wherein they cross claim or apply for an adjustment in the claim made by them. The Arbitral Tribunal shall decide, considering these counterclaims or set-offs whether they are all within the domain of the arbitration agreement.

Explanation 

This gives the respondent a right to counterclaim against the claimant or to set off any amount due to the claimant against the claimed amount. A counterclaim is a claim made by one party in an attempt to cancel, offset, or otherwise diminish the effect of another’s claim, while a set-off refers to the power of a debtor to diminish or extinguish the amount of a claim by the amount owing to the claimant. This clause is relatively broad as it allows for counterclaims and set-offs, which helps the parties handle all connected disputes as part of the same arbitration, which is beneficial in reducing judicial time and achieving a comprehensive resolution between the parties relating to a common point of dispute. However, such counterclaims or set-offs must be directly related to the contractual relationship that was the subject of the arbitration clause, and it has to be agreed by the parties that the Arbitral Tribunal has jurisdiction to hear them.

Amendment and supplementation of claims or defences: Section 23(3)

Each party may also vary, add to or replace the claim or defence at the time of the arbitral proceedings. It states that the amendments and supplements can be disallowed by the Arbitral Tribunal on the grounds that they are unsuitable for making changes because a certain amount of time has elapsed.

Explanation 

This clause is reasonable to allow change because it is not always possible to predict what can happen during a legal case and new information or changes can appear during the arbitration process. The parties are allowed to change or provide new allegations, of claim or factual responses to meet these changes. However, to take full control of the procedure and ensure that the amendments do not prolong the process unreasonably, the Arbitral Tribunal has the power to decline the submission of such amendments as they are regarded as improper due to the time of their submission. This makes it difficult for parties to bring amendments with the initial intent of delaying or to bring new substantive changes in the middle of the arbitration process.

Time frame for completion of statutory statements: Section 23(4)

The statement of claim and defence shall be submitted no later than six months from the date the arbitrator(s) were informed in writing of their appointment.

Explanation

This clause sets a rather strict timeline for the first exchange of statements of claim and defence, whereby both the claimant’s statement of claim and the respondent’s statement of defence have to be submitted not later than six months of the notice of appointment of the arbitrator(s). Preliminary stages are made to last for not more than six months and this time frame is chosen to make sure that there are no excessive delays before the parties head to the arbitration stage to seek resolution to their conflict. This way, it is possible to sustain the efficiency and effectiveness of the arbitration proceedings and the parties get a decision on time.

Scope of Section 23 of Arbitration and Conciliation Act, 1996

Various sections of the Act have been enacted that shall apply for the determination of claims and defence in an arbitration proceeding and these are mentioned in Section 23. In the subsequent years, the Supreme Court of India has expounded on the meaning and reach of this Section in various cases.

The Supreme Court in National Aluminium Co. Ltd. vs. Pressteel & Fabrications (P) Ltd. (2003) pointed towards the need of the claimant and the respondent to express their stand in clear terms. This includes affirming facts for the allegations or justification as well as ascertaining the disputed issues and outlining the desired relief or remedy. The Court pointed out that this requirement helps to minimise the risk that arbitration is commenced on the flawed footing that one party is in a state of ignorance regarding the claims of the other party and their available defences , a position that cannot be regarded as proper or desirable.

In Bharat Sanchar Nigam Ltd. vs. Motorola India Pvt Ltd. (2008), the Supreme Court emphasised that all supporting documents should be produced or their location mentioned at the time of provisional statements. The above provision seeks to prevent submissions of evidence after the purported date, with the justification that it will help to eliminate delays that may arise from late submission of evidence. It keeps all the relevant information in the light of proceedings so that efficient arbitration may take place and the case stays clear from both ends.

In the case of State of Goa vs. Praveen Enterprises (2011), the Court dealt with the provision that deals with changes to claims and defences. Nevertheless, the Act provides that parties can add, change or replace the claims and defences  as the arbitration proceedings are underway with the consent of the Arbitral Tribunal, which, though, has discretion on the matter. The amendments can be disallowed where the tribunal considers them to be improper because of when they were made or because they are likely to prejudice the hearing or the trial in some questionable manner. That is where they are likely to cause delays. This balance makes the arbitration flexible with emerging issues without extending a lot of time on procedures.

The next important topic of Section 23 is the introduction of counterclaims and set-offs, as discussed in Indian Farmers Fertilizer Cooperative Limited vs. Bhadra Products (2018). To elaborate, when the Court grants the respondents leave to bring counterclaims or to plead set-offs, the Court indicates that this way all related issues between the parties can be handled in one proceeding. However, these counterclaims or set-offs must be within the purview of the original arbitration clause under which the Arbitral Tribunal has been constituted. By concentrating all the related issues within a single arbitration process, this provision is effective within the process of judicial efficiency.

In Union of India vs. U.P. State Bridge Corporation Ltd. (2012), the position enshrined above was underlined by the Supreme Court of India, paying much attention to the six months’ period required for the completion of initial statements. This deadline will help in the swift start of the arbitral procedure after the arbitrator(s) was/were informed in writing of their appointment. The Act, in setting the time frame within which the preliminary stages should be accomplished, seeks to reduce the time spent on the same and successfully guide in the resolution of the dispute, not detrimentally affecting the tempo and quality of the arbitration process.

Implication of the retrospective application of Sections 23(4) and 29(4) of the Act

The new changes to the Act made under the Amendment Act of Arbitration and Conciliation in 2019 have raised concerns in Indian arbitration law. Both of these changes were intended to advance the motion of arbitral proceedings by reducing the number of days available to complete pleadings, as defined under Section 23(4) and issuing awards as per Section 29A(1). Though two decisions of the Delhi High Court are at variance with each other, this has created uncertainty in law about the implementation of these amendments in the running arbitrations.

The recent court undertaking in Shapoorji Pallonji And Co. Pvt. Ltd vs. Rattan India Power Ltd & Anr. (2021) has been more liberal. The Court considered the amendments to act solely as procedural changes and consequently, it was possible to apply the new rules starting from the previous year, making them retrospectively effective. It also meant that the ongoing arbitrations, which were the situation in the present case, could benefit from extended time frames to complete the pleadings and to issue an award. It has provided some comfort to parties on how they would be able to discharge the shorter notice periods that were a result of the amendments.

However, a more restrictive approach was developed in the case of MBL Infrastructure Ltd. vs. Rites Ltd. (2021) Accordingly, the Court concluded that these amendments were prospective in the sense that those changes would only apply in cases where arbitration had commenced after the date of the amendments. This stricter interpretation offered additional guidance on whether the amendments would otherwise apply to other cases, but it seems to have created confusion as to whether ongoing arbitrations were forced to conform with the pre-amendment deadlines that were generally shorter.

This kind of clash has profound consequences for the entire process of socio-theological interpretation. The Shapoorji Pallonji approach may look good if it has the capacity to work with the current ongoing proceedings but this raises a lot of concern. Having previously adjusted certain deadlines for arbitration prolongations, their further extension may actually be contrary to the legislative intent of the amendments—to optimise the work on the issue and achieve faster results. This leads to doubt among the arbitrator as well as the respondents, with either party feeling uneasy about the outcome they are likely to receive in an arbitration disagreement.

The different analyses presented by the Delhi High Court serve as a clear indication of why there is a need to have the Supreme Court give its ruling on the matter. It has become important to get a clear legal precedent, meaning that there is a clear and convincing legal foundation regarding the retrospective application of the amended Sections 23(4) & 29A(1). This will clear up what current ongoing arbitrations mean and put a solid standard into place for the future. Until full judgement is given on these matters, the legal position with these arbitrations remains frayed, and while all parties undoubtedly want the process to be as efficient as possible, no one can be sure precisely how critical adherence to the given timescales might be.

Aspect of Section 23 in the process of arbitration

As it is well known, Section 23 of the Act is often considered a mere formality; however, it does contain provisions that set the direction of arbitration in the respective jurisdiction. It thus outlines the procedural regime that leads to the filing of claims and statements of defence by the sides, thereby allowing the Arbitral Tribunal to have a line of demarcation for the dispute. This also implies that status cannot be attained whereby one party will dominate the other and that the arbitration will be conducted in a fair manner.

Understanding the importance of clear and detailed submissions

The specific requirements drawn out in Section 23, which relate to the elaboration and specification of the submissions, include the claimant’s statement of claim and the statement of defence by the respondent, which are pivotal in the sound performance of the function by the Arbitral Tribunal as it relates to the appreciation of the nature of the claim and its validity. These submissions help the tribunals come up with a rational decision as a result of analysing all aspects of the dispute to elude any possibility of siding with any of the parties involved in arbitration.  

Two goals of the Amendment – ease and impartiality in arbitration

The amended provisions under Section 23 allow a party to correct an error, and/or introduce new facts, during arbitration, even though they vest the arbitrators with authority to revisit some of the awards made. Thus, there is an opportunity to achieve proper moderation and fairness when considering such things as the causes of the amendment, the prejudice with which the other side was faced and, at the same time, not becoming detrimental to the arbitration.

Filing of pleadings within 6 months 

According to Section 23(1) of the Act, the statement of claim and defence is to be delivered within the time specified in the agreement by the parties or fixed by the Arbitral Tribunal. Whereas, in the Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter referred to as the “Amendment Act”), the time bar is explicitly mentioned in relation to the bar of time for the completion of pleadings and a new clause in sub-section (4) will be added to Section 23, which states that the pleadings under the section should be completed within 6 months from the date when the arbitrator(s) receives the notice in writing of its appointment. This amendment will give a boost to the completion of the pleadings and thus complement Section 29-A of the Amended Act, which enumerates the time period within which an award may be made. Since the Bill has not mentioned nor linked the current Section 23(1) of the Amended Act to the proposed Section 23(4) there is likely to be initially a conflict between the current Section 23(1) and the proposed Section 23(4) with regards to employee protection, or otherwise that is likely to be a matter of conflict before the Arbitral Tribunal.

Rejoinders and replications in Indian arbitration

The nature and extent of pleadings before an Arbitral Tribunal in India have been defined by the Karnataka High Court in the case of Buoyant Technology Constellations Pvt. Ltd. vs. Manyata Infrastructure Developments Pvt. Ltd. and Anr. (2024). This judgement helps to clarify whether rejoinders or replication/surrejoinders can be regarded as included within pleadings under Section 23(4) of the Act.

The Court further affirmed its view that pleadings allowed under Section 23(4) of the Act pertain to the statement of claim, objections, counterclaim, and objections to the counterclaim. However, rejoinders or replications/sur-rejoinders can be filed in a case with the permission of the ambivalent tribunal. Arbitration agreements must distinguish between the class of constellation of documents that the tribunal is to take into consideration when arriving at the award; this is significant for parties involved in arbitration.

This clarifies the status of proceedings in the Karnataka High Court, which gives definite boundaries for pleadings and makes it simpler for arbitration to occur. It affords each party a fair chance to put forth its arguments while avoiding the sometimes-confounding and time-wasting routine of submitting documents that have already been tendered to the Tribunal.

Landmark judgements surrounding Section 23 of Arbitration and Conciliation Act, 1996

National Highway Authority of India vs. M/s. Patel Engineering Co. Ltd. (2022)

Facts

In the case of National Highway Authority of India vs. M/s. Patel Engineering Co. Ltd. (2022), the National Highway Authority of India (NHAI), the company with authority for highway construction in India, signed a contract with M/s. Patel Engineering Co. Ltd. (Patel Engineering) to fulfil a national highway project. Disputes emerged during the project implementation concerning factors that delayed the completion and costs incurred. They had to demand additional costs from the NHAI with the help of arbitration proceedings that Patel Engineering filed against them. This amount of INR 10 crore and 50 lacs was evidently mentioned in the Statement of Claim, another important document in which Patel Engineering simply assumed “damages” without quantifying or qualifying the same.

Issue

This case was based on whether the content of the statement of the claim submitted by Patel Engineering was adequate. The critical question before the Supreme Court was: As to a more specific characteristic of the claim that may be brought under Section 23(1) of the Act, does a general claim for “damages” suffice or must the claimant be more specific?

Judgement

In this regard, the Supreme Court stated that the bare reference to “damages” without any specifics in the Statement of Claim is not sufficient. The Court noted that in compliance with the requirements of Section 23(1) – the claimant, namely Patel Engineering, and the respondent, namely NHAI, should state their respective cases clearly and with particulars. The affirmation recorded in the allegation must encompass a coherent and concise fact pattern of when, where, and how the contractual difference arose and how NHAI offended various terms of the deal. Even more, it is mandatory that the manner in which the harm was suffered is clearly described in the Statement of Claim as the amount of compensation claimed back. It may include things such as how the extra expenses of the delay are going to be split up, the particularities of the terms of the contract that were allegedly violated and how the method to get to the sum being claimed was arrived at. 

Gail (India) Ltd. vs. Gail (India) Employees’ Union (2018)

Facts

This case of Gail (India) Ltd. vs. Gail (India) Employees’ Union (2018) is a conflict between Gail (India) Ltd., a state owned natural gas processing and marketing company and its employees’ union. Pursuant to these facts, the union framed the Statement of Claim that insisted on various service condition grievances against Gail (India) Ltd., such as wages, promotion, and working hours. Whereas, in this Statement of Claim, certain aspects of these grievances had not been elaborated clearly, which may confuse Gail (India) Ltd. on the exact nature of the claim raised against them.

Issue

This case elaborated on the sufficiency of facts in the covering document set out in Section 23(1). The issue that was faced by the Court was whether the information given by the union in the Statement of Claim was adequate for the requirement under the Act.

Judgement

The Supreme Court recalls the review of the rules regarding the format of the Statement of Claim based on the principles of clarity and definiteness of the factual information provided. Although the Court recognised that an ex tempore narration need not be an excess of details, it noted that enough specifics have to be provided for in the Statement of Claim so that the respondent would understand the factual foundation on which the claims against the respondent were founded. This can be post-accident data such as exact dates, occurrences, policies, or clauses in the contract that the union alleges to be violated. Thus, the Court’s focus on such details should be regarded as its attempt to control the parties’ expectations, and, in so doing, make the subsequent exchange of arguments and evidence during the arbitration proceedings more efficient.

SAIL Employees Union Corporate Office (Regd.) Vs. SAEU & Ors. (2013)

Facts

Like the Gail (India) Ltd. case, this matter,  SAIL Employees Union Corporate Office (Regd.) Vs. SAEU & Ors. (2013) was between the management of the Steel Authority Employee Union (SAEU), a public sector steel plant, and its employees’ union. These included such claims as the union wanted to pursue against the employer and their related evidentiary hearing concerns but the statement failed to specify the civil law issues (points of law in issue) on which the respondents/defendants and the claimants/appellants had disputes. Although the factual backdrop was helpful in providing some background information to the case, there was no clear elucidation as to the specific legal issues that the Arbitral Tribunal was required to address to satisfactorily solve the legal quarrel.

Issue 

In this case, the overall effectiveness for assessing legal issues (points at issue) in the Statement of Claim under Section 23(1) was emphasised. The Courts were put in a position to determine whether the union’s Statement of Claim clearly stated the matters that needed to be answered by the Arbitral Tribunal.

Judgment

In reaching this decision, the Supreme Court insisted that the Statement of Claim is not only supposed to set out the factual background of the matter, but also contain enough details to identify the legal issues before the Arbitral Tribunal. They are called the “points at issue”. In the case of Rashtriya Ispat Nigam Ltd., the statement of claim did not provide clear answers to the specified legal questions. For instance, if the union was suing for unfair dismissal and the dismissal was occasioned by a violation of policy prohibiting loitering around the company premises, then the Statement of Claim should set out legal grounds why the given policy was unlawful. Thus, the possibility of distortion resulting from the need for a definition of the points to be discussed was offset by the goal of making the entire arbitration process more concentrated. The tribunals can then focus on legal issues and matters of interest and relevance without having to waste any time dealing with other inconsequential issues. This also avoids making one party a victim of the other, especially where complex and detailed legal issues would need to be presented before a trial judge, as each side appreciates that the issues to be addressed in the trial are legal in nature.

Harinarayan Bajaj vs. M/S Sheth Securities Pvt. Ltd (2014)

Facts 

In this case, Harinarayan Bajaj vs. M/S Sheth Securities Pvt. Ltd (2014), Bajaj sues Sheth Securities, which is a stockbroking firm for violation of various securities laws governing the Indian securities market. Sheth Securities found itself in the eye of the storm when Bajaj decided to sue through arbitration proceedings on the grounds of mismanagement of its investment portfolio. While in arbitration, Bajaj tried to vary the statement of claim,  adding more accounts of investment that he said were managed weakly by Sheth Securities. These additional accounts were not provided by Bajaj in the Statement of Claim when it commenced the legal action.

Issue

The issues for determination in this case related to the powers of the Arbitral Tribunal to permit amendments to the Statement of Claim emanating from Section 23(3) of the Act. Thus, the Court had to ascertain what circumstances the tribunal should consider to allow Bajaj to alter his claim and include more investment accounts.

Judgment

Specifically, the Supreme Court set out the two-tiered criterion to be followed by the Arbitral Tribunal in relation to the amendments which might be requested during the course of arbitration proceedings. The first prong of the classic totality of the circumstances test is anchored on the element of reasonableness of the delay. The additional accounts have not been included in Bajaj’s Statement of Claim; the tribunal shall review the justifiable cause for such an omission, which, if any, could be considered a justifiable reason for the exclusion? Was there additional information that surfaced after the filing of the claim, leading to the award? The second prong looks into the question of prejudice that may arise on the other party’s side. In this case, the tribunal would evaluate the impact of granting an amendment that results in new investment accounts may put Sheth Securities at a disadvantage. Would they need more time to prove their case and to work on new complaints they have not mentioned until now? The Court also stressed that these two factors should be considered by the tribunal and the decision made should have certain balance. If such a delay is shown to be unacceptable and leads to considerable harm or prejudice to Sheth Securities for them to defend themselves appropriately, then the tribunal may well refuse to allow an amendment. Nonetheless, equity can be shown because of the circumstances that led to the delay, and the prejudice that may result if the amendment is not allowed. The tribunal may accept the amendment in order to give the parties a chance of a full trial where the dispute could be exhaustively resolved.

Bhatia International Ltd. & Ors. vs. Bulk Carriers Pvt. Ltd. (2002)

Facts

This case, Bhatia International Ltd. & Ors. vs. Bulk Carriers Pvt. Ltd. (2002), was a contractual dispute between Bhatia International Ltd. and its associates, as Bhatia, and Bulk Carriers Pvt. Ltd. or Bulk Carriers, wherein they were in a charter party that was a contract for the hiring of a ship. Bhatia sought arbitration against Bulk Carriers, wherein he brought several claims arising in connection with the charter party. While on the stand during the trial, Bhatia also applied for an amendment of the Statement of Claim to include a new point of law. This new argument directly attacked a particular clause contained in the charter party, which hitherto had been a non-issue for Bhatia.

Issue

This case was more specific to Section 23(3) and the question of whether or not a plaintiff is allowed to alter prior statements in order to add fresh legal arguments to the case. In the legal dispute, the Court had to decide whether the tribunal could exercise discretion in allowing changes that introduced new legal points during the arbitration.

Judgement

The Supreme Court reaffirmed the Arbitral Tribunal as having general discretion on allowing amendments to statements under Section 23(3). Preferably, parties are entitled to amend their case during the arbitration but new legal grounds which are raised very close to the end may offend the other side. The Court also recognised that Bhatia’s attempt to introduce a new legal argument could extend the burden to bulk carriers, who may need to reassess/respond to this facet of the lawsuit. The tribunal, therefore, has to address whether allowing such amendments might have an impact in the overall fairness of the proceeding. Where this new legal argument would place bulk carriers at a disadvantage and where the new argument can interrupt the flow of arbitration, the tribunal is likely to reject the amendment. However, if the new argument does relate to an important legal question which may be fairly debatable with reference to the case, and if the prejudice to the bulk carriers can be avoided then the tribunal will allow the amendment in order to provide the best opportunity of addressing all legal issues arising in the case.

The Court also incorporated the knowledge that the tribunal has a discretionary power whereby it may exercise in relation to the circumstances of any case in order to conclude whether an extension of time needs to be honoured. 

National Highway Authority of India vs. Transstroy (India) Limited (2022)

Facts

In this case of National Highway Authority of India vs. Transstroy (India) Limited (2022), some issues arose  between the National Highway Authority of India (NHAI) and Transstroy (India) Limited (Transstroy) over a highway construction project. NHAI started an arbitration process against Transstroy for various alleged contractual breaches within the construction agreement. In response to this lawsuit, Transstroy had filed a counterclaim alleging that the design provided for the project by NHAI was substandard and had caused extra costs and time to be incurred.

Issue

The core issue to be determined in this case includes whether Section 23(2A) of the Act requires that a counterclaim must necessarily spring from the same facts as the original claim. The Court had to decide the extent to which counterclaims are allowed in an arbitration process.

Judgment

The Supreme Court said that a counterclaim does not necessarily need to correspond to the facts stated in the original claim. There is, however, one crucial condition it has to meet: it has to be within the sphere of the arbitration clause agreed between the parties. In this case, while the claim by NHAI was based on alleged breaches by Transstroy, the counterclaim based on design defects was in connection with the same construction project and the contractual relationship between NHAI and Transstroy. Hence, the Court found that the counterclaim falls under Section 23(2A) and so admitted it.

The Court established a two-pronged test for assessing the admissibility of counterclaims:

Connection to the original dispute: The counterclaim must be related to the initial controversy stemming from the same contract or identity of parties or legal relationship. In this case, the claim and the counterclaim that were filed during the litigation process were in regard to the same highway construction work under the contract that was entered into between NHAI and Transstroy.

Scope of the arbitration agreement: The counterclaim must be either within the confines of the arbitration agreement formula that permits the Arbitral Tribunal to hear the dispute or derive from the same formula. The arbitration clause in this case could extend to all considerations pertaining to the construction project, including perceived defects with the design offered by NHAI.

Thus, by applying this test in the above case, the Court ensured that counterclaims are protected from flooding the arbitration process with new and unrelated claims. However, in the civil litigation system, counterclaims act as a useful method whereby the respondent is allowed to sue for claims based on facts and circumstances that relate to the facts on the claim. 

Possible challenges with Section 23

Despite its aim at allowing for the smooth commencement of arbitration proceedings, Section 23 of the Arbitration and Conciliation Act, 1996 has certain peculiarities that may emerge as obstacles. The first problem relates to the quality of Section 23(1) which talks about the claim and defence, namely the notice that has to be given by the liable party together with the statement of defence with reference to the claim. Ambiguous or partially stated decisions can provoke conflicts in the future. While it is relatively easy to suggest that all statements should be brief and to the point, this is impossible without proper legal assistance which may not be easily accessible to most parties. This leads to confusion and unnecessary crossings and counter-crossings as the other party fails to grasp the capacity of the cause of action or the denial.

Yet, another risk relates to changes in claims and/or their defences during the proceedings under Section 23(3). Although this flexibility is applied to enable modification of arguments as circumstances change, this flexibility may be abused. This may be used by the party that prefers to delay sending a complete claim since the other party might be exposed to new techniques in the process. This can be very displeasing and unconstructive to the proper progress of the arbitration. Adding on to this, the arbitrator has the power not to allow amendment where there has been unreasonable delay in making the amendment. The above position of this judgement is subjective, and different people might have different opinions as to whether the amendment is an attempt to stall or a proper response to new events.

The amendment, which happened in 2019 with Section 23(4) actually specified a time limit of 6 months for effecting statements, also makes it difficult. Even though this is done in an effort to fasten the process, it is usually unrealistic because finding evidence and formulating strong arguments usually takes time in some cases. Varying deadlines may put pressure on the existence of time in order to come up with good quality statements, which may in turn result in poor presentation of a case.

Finally, Section 23 has limitations because defining when the agreement begins the arbitration process can present initial challenges. Disputes might develop concerning the interpretation of the coverage of the said agreement where the whole agreement is fraught with flaws. This may result in protracted discussions about whether arbitration is the right place for solving the dispute in the first place, presaging further time wasted on argumentation of the dispute’s essence, rather than its solution.

Critical analysis 

Analysing Section 23 of the Arbitration and Conciliation Act, 1996 and its judicial application can show that it holds the key to determining the development of the arbitration procedure in India. In this section, basic procedural issues relating to arbitration practice including the making of claims and defences, tender of evidence, introduction of counter claims and set offs are provided which affects the efficiency and the fairness of the arbitration.

This provision found under Section 23(1) of the Act provides clarity on the status of the submissions made to the Arbitral Tribunal and thus guarantees effective working of the Arbitral Tribunal. This provision has become useful for negating frivolous claims and defences, as stressed in prominent judicial decisions including National Aluminium Co. Ltd. vs. Pressteel & Fabrications (P) Ltd. and Bharat Sanchar Nigam Ltd. vs. Motorola India Pvt Ltd. Section 23(2) which provides for submission of the documents strengthens the structure of arbitration and helps in making expeditious presentation of the evidence. On this aspect, this provision also enables the future referencing of this evidence, as and when the need arises without necessarily prolonging the process. Moreover, counterclaims and set-offs that fall under Section 23(2A) help address multiple connected problems between parties which function in the best interest of judicial economy as well as integrate the issues in one dispute. Section 23(3) regulates the changes and additions to the claims or defences as an opportunity for the variations and additions or replacements within the arbitral process but at the same time prevents the abuse of the procedure.

The period of time stated for the completion of statutory statements in Section 23(4) elucidates the general proviso with regards to not allowing the arbitration stages to be dragged along in the initial stages. However, the net effect of the said amendments together with the controversy of applying Sections 23(4) and 29(4) of the Act retrospectively in on-going arbitrations too has become a matter of debate. The case led to the uncertainty in the meaning and coverage of the enacted amendments being manifested by the conflicting rulings by the Delhi High Court. Therefore, the role which is played by Section 23 in the whole process of arbitration is very crucial. Despite it having formality of a technicality, the provisions encapsulated therein provided the concept of fairness, effectiveness, and basic standard in the arbitration process. Recent changes under Section 23 and Section 24 of the Act, intended to enhance the ease and neutrality of arbitration, strike the right chord of maintaining the procedural freedom along with protecting the parties’ rights. Therefore, it is imperative to conclude the performance analysis of Section 23 of the Arbitration and Conciliation Act, 1996 with an acknowledgement of such a statutory provision’s importance to the development of arbitration in India. The gradual legal realist and consequentialist attitude demonstrated by the Courts to adjudicate and implement these provisions is the cardinal feature of the evolutionary nature of the arbitration law of India while seeking to create a favourable, fair and effective arbitral climate.

Conclusion

Hence, Section 23 in the Act, is a crucial and relevant section to maintain the credibility of the arbitration process. Able to file and serve the statements of claim and defence within the set time bar, flexibility that the tribunal can accord to the amendment of the pleadings, and preciseness in drafting the documents which are some of the factors that help in achieving the core values justice and efficiency that characterises the effective handling of the disputes. Various judgements of the Supreme Court undertake a significant role in shedding more light on these provisions and the rationale aetiologies the existence of sound legislation including timely measures and general public compliance of the legal requisites of arbitration. In the light of these principles, the parties will have a proper standing to understand the whole process of arbitration in a more efficient way hence, leading to the determination of the issue in a more efficient manner.  

Frequently asked questions 

If the arbitration agreement does not contemplate the time of filing, Can the assessment proceed without agreement and the claimant provide the statement at any time prior to the hearing?

The absence of the time bar for the commencement of the arbitration proceedings from both the arbitration clause and in section 23(1) still obliges the claimant to act without reference to the date. But Section 23(1) of the regulations narrowed efficient proceedings as they are unable to post their claim statement at any time before the hearing. The reason for claiming for an indefinite suspension of time is because it would prejudice the respondent in defending the case when they find the claim filed and they did not. In this case, the best way to step up the pressure on the claimant is to ask the Arbitral Tribunal to agree to be given a reasonable time within which to file the statement. Therefore, depending on the different contingencies of the case and the practice particularly set by the tribunal on the different cases, the timeframe is considered well and set in such a way that will give all the parties to the case a fair deal as it meets the practical effectiveness of the system.

For instance if the case is a commercial one involving many documents especially in the financial aspect then it is not a contract clause breach explication, then the tribunal will take more time than the latter. This way, there are reasonable certainties that each side will have the adequate time they need to gather evidence, formulate their arguments and adequately present their cases.

Can the parties extend the amendment of their claim under Section 23(3) to cover their new information?

Yes, there is provision for amendment of claim or defence as provided under Section 23(3) of the Act. This provision may also relate to being allowed to present new evidence that would present a bolster for the company’s position. Nonetheless, the timing of the discovery and possibly prejudice that the supplier may have suffered are some of the issues that may cause a shift in the balance.

The tribunal will assess several factors before allowing the amendment:

  • Timing of discovery: Was the evidence more available back then and we just did not notice? Hence, the tribunal may be less inclined to accept an amendment if the evidence could feasibly have been unearthed with what is regarded as reasonable diligence before the initial claim was lodged. However, the tribunal may be more lenient if the evidence was discovered because of circumstances beyond the parties’ control.
  • Prejudice to respondent: Is it possible to conclude that the new evidence has a material impact on the nature of the claim and that the supplier will need to make quite radical changes to the defence strategy? The tribunal might impose conditions related to the case to have the outcome fair. These could be extending the time within which the supplier has to respond or demanding for the company to compensate for any other costs incurred due to amendments made. For example, if the new evidence shows a new witness that goes against the supplier’s first defence, the tribunal may allow them more time to talk to the witness and defend their position appropriately.

What if a party was not aware of these particular claims while preparing the initial statement of claim; can they bring into operation such claims?

It is possible for a party to introduce new claims in a case after the statement of claim as long as the appropriate legal basis for not knowing or not being able to know at the time the document was lodged will suffice and be reasonable in the eyes of the law. This is based on the sound discretion of the tribunal coupled with its valuation of the occurrence. To get this exception granted, the party must have good cause which can include new evidence or information that may have been unknown at the time of trial. Some of the conditions, which the tribunal will examine before allowing amendment of the claim/s include – the timing of the subsequent claims, relevance of the new claim/s as well as the effect of the amendment on the overall efficiency of the arbitration. Acknowledgment has to be made of the fact that the introduction of new claims on one’s part as the assertion of different causes of action does not have the evil intent of prolonging the existing legal process or causing prejudice that cannot be made good to the other party. The tribunal will be mainly worried about the fairness and equality of its proceedings as well as the desire to complete its work, and at the same time, provide everyone with an opportunity to give evidence of all circumstances.

What happens if the respondents did not file a statement of defence to the complaint within the mandated six months?

Pursuant to the aforementioned situation, if the respondent does not file the statement of defence within the six months’ time, the arbitration can proceed. The tribunal will proceed with the materials on record and the documents and proof filed by the claimant and any other proof which might have been adduced in the hearing of the case. Thus, the lack of preparation or failure to submit a defence does not lead to the claimant being granted a default judgement. However, the tribunal will consider the above evidence offered by the claimant and decide on its merit. Even where the respondent has not filed a response, it cannot be interpreted to mean that it is a default judgement mechanism, thus, the weakness caused to the respondent’s side by the lack of defence.

Can a party seek for more time for the filing of a statement of claim or defence beyond the six months?

Yes, it is true that a party may apply for extension of time within which to file a statement of claim/defence beyond the time of six months. The requests are made at the discretion of the tribunal. The party that is requesting the extension has to explain why he/she needs the extension and the reasons could be elaborated as the case is complicated, there are other matters that needed the attention of the requesting party or the circumstances that were beyond the control of the requesting party. The tribunal shall consider these reasons against the requirement for a more efficient process, and the impact on the other side. If the tribunal considers the extension request as being reasonable and has heard a justifiable reason why it is important to need an extension in order to have a fair trial then an extension will be granted. But it will also contemplate how best to avoid the impact of such a decision on the time frame of the proceedings and may then propose new timelines that are suitable for the arbitration process.

References 

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