Once Arbitration Commences, Parties Must Wait for Final Award: Delhi High Court Refuses NHAI’s Plea to Exit Arbitral Proceedings

"Substitution of parties in arbitration not permissible when claimant is not party to settlement—assignment doesn’t transfer liability without consent", In a significant ruling reinforcing the limited judicial interference in arbitral proceedings, the Delhi High Court dismissed a petition by the National Highways Authority of India (NHAI) under Article 227 of the Constitution, challenging the arbitral tribunal’s refusal to substitute the NHAI with the concessionaire (IL&FS) in ongoing arbitration initiated by CFM Asset Reconstruction Pvt. Ltd., assignee of senior lenders.

Justice Girish Kathpalia, delivering a reportable judgment in CM(M) 2031/2025, held that arbitral autonomy must be preserved, and substitution of parties under Order XXII Rule 10 CPC cannot be used to “drop” a non-claimant party from proceedings, particularly when the claimant is not privy to the agreement on which substitution is sought.

“Orders rejecting procedural substitution are not appealable; petition under Article 227 lies only in cases of patent illegality”

Reiterating the statutory scheme of the Arbitration and Conciliation Act, 1996, the Court underscored the bar on judicial intervention under Section 5, and held that orders rejecting substitution applications are not appealable under Section 37. The Court ruled:

“The jurisdiction under Article 227 is not meant to correct a simple mistake of fact or law… it must be exercised in exceptional rarity, wherein one party is left remediless under the statute or a clear bad faith is shown.”

The Court found no such exceptional circumstances in the present case, noting that CFM Asset Reconstruction Pvt. Ltd., as assignee of the lenders, was not a party to the Settlement Agreement between NHAI and the concessionaire (Respondent No. 2), and therefore could not be bound by it or deprived of its claim.

NHAI’s attempt to shift arbitral liability to concessionaire without claimant’s consent rejected

NHAI had sought its discharge from the arbitral proceedings, arguing that under the Settlement Agreement dated 01.07.2022, approved by the NCLT, it had paid all dues to the concessionaire, and all liabilities should now be borne by the SPV, i.e., IL&FS Transportation Networks Ltd. The concessionaire had already taken over the project and was to distribute settlement proceeds to lenders.

However, the arbitral tribunal and the High Court both rejected this argument. Justice Kathpalia observed:

“An assignee can certainly be joined as a party… but in the present case, the claimant was not party to the settlement, and the proposed substituted party (concessionaire) is not an assignee.”

“What the petitioner seeks is not impleadment of the concessionaire alongside itself, but to completely substitute itself—such substitution risks frustration of claims.”

No “bad faith” shown by concessionaire – Doctrine applies only to parties in arbitration

The Court also dismissed the argument that refusal by the concessionaire to support NHAI’s substitution plea amounted to “bad faith”, which, under Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd. [(2022) 1 SCC 75], could justify Article 227 interference.

Justice Kathpalia clarified:

“The ‘bad faith’ doctrine propounded in Bhaven Construction contemplates the same in reference to the parties to the arbitral proceedings and not a stranger who is sought to be brought in.”

Moreover, the Court held that there were no pleadings or evidence of bad faith against the concessionaire in the first place.

Arbitration remains a party-centric process—no substitution absent privity

Refusing to dilute the sanctity of arbitration proceedings, the Court reiterated that arbitration is founded upon an arbitration agreement, and substitution of parties must preserve the integrity of that agreement.

The Tribunal’s reasoning was endorsed: “The claimant (CFM) is not a party to the Settlement Agreement… the dispute cannot be adjudicated in the absence of NHAI, which is the contracting party to the arbitration agreement.”

“Assignment of debt does not ipso facto transfer liabilities; obligations cannot be unilaterally shifted without creditor’s consent.”

The concessionaire had not agreed to assume NHAI’s liabilities toward CFM, and even opposed being substituted, further defeating the petitioner’s plea.

Court advises patience—statutory remedies lie after award under Section 34

The Court emphasized that even if the petitioner has grievances about the tribunal’s decision, the correct legal course is to challenge the final arbitral award under Section 34, not to interrupt the proceedings midstream.

Referring to SBP & Co. v. Patel Engineering [(2005) 8 SCC 618] and Deep Industries Ltd. v. ONGC Ltd. [(2020) 15 SCC 706], the Court reiterated:

“Once arbitration has commenced in the arbitral tribunal, parties have to wait until the award is pronounced, unless a right of appeal is available under Section 37.”

It was also held that allowing such substitution mid-arbitration would not only broaden the scope of the arbitration, but could also defeat the claims entirely, since the proposed substituted party had no obligation to defend or satisfy the claimant’s case.

Dismissing the petition, the Court refused to interfere under its supervisory jurisdiction, holding:

“The present case does not fall under any of the categories in which this court can justifiably interfere… the petition and the accompanying application are dismissed.”

This ruling serves as a strong reaffirmation of the principle of arbitral autonomy, reminding litigants and public authorities alike that judicial interference during arbitral proceedings is to be invoked only in the rarest cases, and that settlement arrangements between non-claimants cannot defeat rights of independent claimants who are not party to them.

Date of Decision: 26 November 2025