Agreement determines arbitrator’s scope

Is a counterclaim that has not been urged before the court maintainable in an arbitration proceeding? Ruling in State of Goa v Praveen Enterprises, the Supreme Court held: “where the arbitration agreement provides for referring all disputes between the parties … the arbitrator will have jurisdiction to entertain any counterclaim, even though it was not raised at a stage earlier to the stage of pleadings before the arbitrator.”

In State of Goa, the Supreme Court was considering whether a party to an arbitration is prevented from making a counterclaim unless:

i. it has served a notice upon the claimant requesting that disputes relating to that counterclaim be referred to arbitration and the claimant had concurred to refer the counterclaim to the same arbitrator; and/or

ii. it had set out the counterclaim in its reply / statement of objections to the claimant’s application for appointment of an arbitrator and the court refers such counterclaim also to arbitration.

Brief facts

The state of Goa entered into a contract with Praveen Enterprises (PE) to carry out certain construction work, but the contract was subsequently terminated on the ground of non-completion of the work.

This prompted PE to raise certain claims under the contract and to give notice to the state to appoint an arbitrator. The state failed to appoint an arbitrator and PE filed for appointment of an arbitrator under section 11 of the Arbitration & Conciliation Act, 1996, which was allowed.

PE filed its claim before the arbitrator and the state filed a counterclaim. The arbitrator made an award allowing three of PE’s 14 claims and one of the state’s three counterclaims. PE challenged the award at the district court, where it was held that the arbitrator could not enlarge the scope of the reference and entertain fresh claims or counterclaims.

The state then unsuccessfully appealed to Bombay High Court. Citing its decision in Charuvil Koshy Verghese v State of Goa, the high court held that the arbitrator had no jurisdiction to entertain a counterclaim that had neither been placed before the court in proceedings for filing the arbitration agreement and referring the disputes to arbitration (under section 20 of the Arbitration Act, 1940) nor referred to the arbitrator by the court.

Arguments at apex court

Appealing this at the Supreme Court, the state argued there had been no bar in the arbitration agreement and as such, it was entitled to raise counterclaims before the arbitrator even if the counterclaims had not been urged during proceedings for the appointment of the arbitrator.

The state contended that even in the absence of reference by the court, the arbitrator would have jurisdiction to entertain a counterclaim, and the provisions of the 1940 act were materially different from those under the 1996 act.

Opposing the appeal, PE argued that an arbitrator has jurisdiction to entertain a counterclaim only if it was referred to him following a notice seeking arbitration in regard to such counterclaim. PE also argued that only claims (and counterclaims) that had been specifically detailed in the application for appointment of an arbitrator can be the subject matter of arbitration.

The final word

The Supreme Court held PE’s arguments were based on the erroneous assumption that it is necessary for the court in an application for appointment of an arbitrator to determine whether the claims and counterclaims are barred by limitation. Clarifying the position in SBP & Co v Patel Engineering and in National Insurance Co Ltd v Boghara Polyfab Pvt Ltd, the Supreme Court held that on an application for appointment of an arbitrator, the court may consider whether to refer certain claims which were so hopelessly barred by limitation that they did not deserve to be referred to arbitration.

The Supreme Court held that while considering an application for appointment of an arbitrator, the court “is not required to draw up the list of disputes and refer them to arbitration. The appointment of Arbitral Tribunal is an implied reference in terms of the arbitration agreement.”

The apex court however clarified that where an arbitration agreement requires that only specific disputes be referred to arbitration, “the arbitrator’s jurisdiction is controlled by the specific reference and he cannot travel beyond the reference, nor entertain any additional claims or counterclaims which are not part of the disputes specifically referred to arbitration.”

This observation ought to be kept in mind while drafting arbitration clauses so as to either restrict or enlarge the scope of the arbitrator.

The Supreme Court therefore allowed the state’s appeal and upheld the arbitrator’s award in its entirety.

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Vivek Vashi is a partner in the litigation department at Bharucha & Partners where Jehangir Jejeebhoy is an associate.