NHAI Fails to Secure Substitution in Arbitration: Delhi HC Refuses Intervention

The High Court of Delhi has reiterated the principle of minimal judicial intervention in arbitral proceedings, dismissing a petition filed by the National Highways Authority of India (NHAI). The court upheld an Arbitral Tribunal’s order that rejected NHAI’s attempt to be discharged from arbitration by substituting itself with a project-specific Special Purpose Vehicle.

A Complex Legal History

The dispute stems from a Concession Agreement concerning the development and maintenance of a portion of National Highway 8B. While the initial project was awarded to the Infrastructure Leasing and Financial Services Ltd. (ILFS), a special purpose vehicle (the respondent no. 2) was incorporated to execute the venture. Following alleged financial disputes and the subsequent issuance of a Termination Notice by NHAI in December 2021, various legal battles ensued before the NCLAT and the Delhi High Court.

Despite a court-ordered conciliation process, which included a Settlement Agreement between NHAI and the concessionaire, the respondent, CFM Asset Reconstruction Pvt Ltd., remained outside the settlement process. CFM, having acquired the rights of senior lenders, initiated claim proceedings against NHAI. NHAI subsequently filed an application under Order XXII Rule 10 of the Code of Civil Procedure (CPC) before the Arbitral Tribunal, seeking its own discharge in favor of the concessionaire.

The Arguments

NHAI, represented by the Solicitor General of India, argued that the Settlement Agreement had fundamentally transferred all liability to respondent no. 2. Failure to substitute the party, the petitioner argued, would undermine the sanctity of the conciliation process and potentially result in bad faith enforcement when full dues had already been distributed to the concessionaire.

Conversely, the respondent argued that the arbitration arose from the Concession Agreement, which did not account for the substitution agreement. Furthermore, they emphasized that the claimant (CFM) was never a party to the settlement discussions, making the settlement non-binding upon them. The tribunal and the High Court both weighed the potential for "colossal loss" if a party against whom claims were made were allowed to unilaterally drop itself from proceedings.

Judicial Analysis: The Pulse of the Arbitration Act

Justice Girish Kathpalia observed that the scope of judicial interference under Article 227 of the Constitution is "extremely narrow" when dealing with arbitral tribunals. Referring to the landmark precedent of SBP & Company vs Patel Engineering , the court noted:

> "The object of minimizing judicial intervention while the matter is in the process of being arbitrated upon, will certainly be defeated if the High Court could be approached under Article 227 of the Constitution of India... against every order made by the arbitral tribunal."

The court further distinguished the "bad faith" doctrine, clarifying that it applies to the conduct of parties already within the arbitral framework, not to strangers to the arbitration agreement.

Key Observations

The judgment clarifies several vital points regarding procedural fairness in arbitration:

• Non-Binding Settlements: "Any agreement between the non-claimant (the present petitioner) and a stranger to the arbitration (the present respondent no. 2) as regards transfer of liabilities cannot bind the claimant (the present respondent no. 1) before the Arbitral Tribunal."
• Finality of Process: "The parties suffering rejection of applications under Section 16 of the Act... must wait till a final award is passed and challenged under Section 34 of the Act."
• Exceptional Circumstances: "The power [under Article 227] needs to be exercised in exceptional rarity, wherein one party is left remediless under the statute or a clear ‘bad faith’ shown by one of the parties."

Implications for Future Litigation

By dismissing the petition, the Delhi High Court has sent a strong signal that arbitral tribunals must maintain their jurisdiction without constant interference from the supervisory courts. This decision reinforces that public entities cannot use settlement agreements with third parties to unilaterally discharge themselves from pending arbitration if those agreements prejudice the rights of the existing claimant. For legal practitioners, the case serves as a reminder to ensure that all stakeholders are included in settlement processes, as failure to do so may render such settlements useless in blocking ongoing claims.