Award That Shocks the Conscience Must Fall: Delhi High Court Sets Aside Arbitral Award for Denying Opportunity to Prove Counter-Claim

“Pleadings Must Be Read As A Whole, Not In Bits – Arbitrator’s Refusal To Frame Issue On Pleaded Counter-Claim Shocks Judicial Conscience” –  Delhi High Court, in a reportable judgment authored by Justice Jasmeet Singh, set aside an arbitral award dated 18 June 2010, on the ground that the Arbitrator failed to frame an issue on a pleaded counter-claim of Rs. 11.88 crores, thereby denying the petitioner a fair opportunity to lead evidence and violating the fundamental policy of Indian law.

High Court allowed the petition under Section 34 of the Arbitration and Conciliation Act, 1996, holding that the arbitrator’s refusal to frame an issue on the counter-claim, merely because it was not included in the prayer clause, amounted to a miscarriage of justice.

The petitioner, Indraprastha Power Generation Co. Ltd., a PSU of the Government of NCT of Delhi, awarded a contract to the respondent, E.M. Services (I) Pvt. Ltd., for the supply and replacement of critical spares at a power turbine unit. While executing the contract, disputes arose due to a 33-day delay in completion, during which the unit remained non-operational. The respondent initiated arbitration, claiming amounts for unpaid invoices and interest, while the petitioner, in its reply dated 13.03.2008, quantified its loss at Rs. 11.88 crores, caused due to the alleged delay and resultant non-generation of electricity.

Despite this specific averment, the Sole Arbitrator, in an order dated 13.02.2009, refused to frame an issue on the counter-claim, reasoning that there was no formal prayer in the reply.

An award dated 18.06.2010 was passed allowing the respondent’s claims with minor deductions. The petitioner’s counter-claim was ignored, and the arbitrator later held that there was no evidence to support it.

Aggrieved, the petitioner approached the High Court under Section 34 seeking to set aside the award.

Justice Jasmeet Singh considered whether the arbitrator’s refusal to frame an issue on the pleaded counter-claim amounted to a violation of the fundamental policy of Indian law, and whether such omission denied the petitioner the opportunity to lead evidence and seek adjudication.

The Court reiterated the limited scope of interference under Section 34, but stressed that violations of natural justice or basic notions of justice fall squarely within the purview of interference.

Quoting OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions (India) (P) Ltd., (2025) 2 SCC 417, the Court noted:

“Violation of the principles of natural justice, or the most basic notions of justice, can render an award vulnerable under Section 34. Such violation must shock the conscience of the Court.”

“Every Disputed Fact and Its Denial Constitutes an Issue” – Arbitrator Must Frame Issue If Counter-Claim Is Pleaded and Denied

The Court examined the record and found that para 8 of the petitioner’s reply clearly quantified the counter-claim at Rs. 11.88 crores, and further, the respondent in its rejoinder categorically denied the same.

Extracting the arbitrator’s order dated 13.02.2009, the Court noted: “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.”

Calling this reasoning flawed, Justice Singh observed: “Once there is a counter-claim of the petitioner in its pleading and the petitioner has spelt out the reasons as well as the basis for arriving at the figure, and the respondent has denied it, it was incumbent upon the learned Sole Arbitrator to frame an issue in this regard.”

The Court underscored the principle: “Issues are questions framed for determination of the lis between the parties based on disputed facts or law. The Arbitrator erred in holding that the absence of a prayer clause disabled the framing of an issue.”

In words that formed the crux of the ruling, the Court held: “Pleadings are to be read as a whole, not in bits and pieces.”

“Defect, If Any, Ought to Have Been Cured – Arbitrator Cannot Reject a Pleaded Claim Without Affording Opportunity”

Referring to the Supreme Court’s judgment in Union of India v. Tata Teleservices (2007) 7 SCC 517, the Court emphasized that even if a pleading is defective, the Arbitrator is bound to afford an opportunity to cure it.

Justice Singh observed: “Even if there was some vagueness or deficiency, the learned Arbitrator ought to have directed the petitioner to cure the defect. To reject the counter-claim outright, without such an opportunity, violates the principles of justice.”

The Court relied on Section 23(2A) of the Arbitration Act, which clearly allows a respondent to file a counter-claim or set-off, and emphasized that there is no rigid format required.

Petitioner Denied Opportunity to Lead Evidence — Arbitrator’s Finding Unsustainable

The arbitrator, in the award, held that the petitioner had failed to prove any loss. Rejecting this, the Court held: “Once the counter-claim was not made an issue, the petitioner had no opportunity to lead evidence. A finding of failure to prove cannot be sustained in law if the party was not allowed to establish it.”

Quoting from the judgment: “Evidence is led on issues framed by the tribunal. Since no issue was framed on the counter-claim, evidence could not have been led, and the finding against the petitioner is legally untenable.”

Court Differentiates From Cases Cited by Respondent

Addressing the respondent’s reliance on Akella Lalitha v. Konda Hanumantha Rao and Jakki Mull & Sons v. Jagdish Thakral, the Court distinguished those cases, noting that in both, there was either no pleading or no denial, unlike the present case where the counter-claim was specifically pleaded and denied, thus constituting a live issue.

Holding that the refusal to frame an issue on a pleaded and disputed counter-claim deprived the petitioner of its right to adjudication and to lead evidence, the Delhi High Court found that the award violated both the fundamental policy of Indian law and the most basic notions of justice.

In conclusion, the Court declared: “The Arbitral Award dated 18.06.2010 is in conflict with the fundamental policy of Indian Law. In addition, it suffers from violation of most basic notions of justice. Since there was no issue, the petitioner could not lead any evidence. The petitioner was clearly deprived of adjudication, and the same shocks the conscience of the Court.”

Accordingly, the Court set aside the award and allowed the petition under Section 34, reiterating that arbitral discretion is subject to basic procedural fairness and cannot operate to the exclusion of due process.

Date of Decision: 13 August 2025