Second Arbitral Reference Maintainable When Award Set Aside Without Merits Adjudication: J&K&L High Court

Introduction

In a significant ruling for arbitration law practitioners, the High Court of Jammu & Kashmir and Ladakh at Srinagar has affirmed that a second reference to arbitration remains maintainable under Section 11(6) of the Arbitration and Conciliation Act, 1996, when a prior arbitral award is set aside under Section 34 without any adjudication on the merits of the underlying claims. This decision, delivered by Hon'ble Mr. Justice Sanjay Dhar on December 26, 2025, in Arb. P. No. 27/2025, resolves a petition filed by M/S Sohrab Iqbal Goni (JV) against the Director, Transport J&K Economic Reconstruction Agency (ERA). The court appointed former Judge Hon'ble Shri Justice M. K. Hanjura as the sole arbitrator to adjudicate the unresolved disputes arising from a 2008 construction contract for a bridge over Ferozpora Nalla at Chanapora Kunzar.

The ruling underscores the balance between promoting the finality of arbitral awards and ensuring that genuine disputes are not left in limbo due to procedural infirmities in prior proceedings. It comes at a time when Indian courts are increasingly refining the scope of judicial intervention in arbitration, particularly post the 2015 and 2019 amendments to the Act, which emphasize minimal interference to foster India's position as an arbitration-friendly jurisdiction. This decision builds on recent high court precedents and has implications for contractors and government agencies involved in public infrastructure projects, where disputes over delays, payments, and terminations are common.

Case Background

The dispute traces back to April 9, 2008, when the ERA, on behalf of the Government of Jammu & Kashmir, invited bids for the construction of a 54-meter span bridge over Ferozpora Nalla. M/S Sohrab Iqbal Goni (JV), a joint venture of contractors, submitted the lowest bid, leading to the execution of the agreement. The work was slated to commence 28 days later, but challenges soon emerged. During construction, disagreements arose over alleged delays in completion and faults in the bridge's design, exacerbated by unprecedented floods in 2010 that disrupted progress.

Tensions escalated, culminating in the contract's foreclosure by the ERA. In January 2015, the petitioner issued a termination notice under Clause 6.2 of the General Conditions of Contract (GCC), accusing the respondents of unilateral and arbitrary actions that deprived them of legitimate profits, investments, and compensation for liquidated and unliquidated damages. The petitioner quantified their grievances into ten detailed claims totaling over Rs. 26.52 crore, covering issues such as earthwork for diversions, haltage and losses from steel issues, flood-related damages, withheld payments, loss of profits, arbitrary labor cess deductions, liquidated damages deductions, delay-related losses not attributable to the petitioner, non-issuance of essential certificates, and breach of contract by the respondent.

Prior to this petition, disputes had led to an initial arbitral reference. On July 2, 2018, the High Court in A.A. No. 16/2014 appointed Shri Abdul Rashid Malik, District & Sessions Judge, as the sole arbitrator. Before him, the petitioner filed their statement of claims, while the respondents countered with three claims: Rs. 1 crore under Clause 2.5 of the GCC, Rs. 7.18 lakh for staff salaries, and arbitrator fees.

The arbitrator, after evaluating pleadings, oral testimony, and documentary evidence, delivered a detailed award on January 21, 2022. It rejected nine of the petitioner's claims as unsubstantiated, allowing only Claim No. 7 (related to losses from liquidated damages deductions and withheld securities) for Rs. 63,13,511, plus 6% interest from the award date. All respondent counterclaims were dismissed.

Dissatisfied, both parties challenged the award under Section 34 before the Designated Commercial Court, Srinagar. On April 24, 2025, the court allowed both petitions, setting aside the award on grounds including failure to appreciate contract provisions, violation of statutory mandates, principles of natural justice, lack of application of mind, and conflict with public policy. Crucially, the order did not delve into the merits of the claims or counterclaims, instead noting that it would not prejudice "further proceedings, if any carried before the arbitrator in future." No appeal under Section 37 was filed, rendering the set-aside order final.

With disputes lingering unresolved, the petitioner invoked the arbitration clause afresh via a notice under Section 21 of the Act. The respondents' non-response prompted this Section 11(6) petition, filed to appoint a new arbitrator and refer the disputes covered under Clause 20.6 of the GCC.

The timeline highlights the protracted nature of such disputes: from contract execution in 2008 to first arbitration in 2018, award in 2022, set-aside in 2025, and now a second reference in late 2025. This backdrop illustrates the practical challenges in public procurement arbitration, where technical construction issues intersect with legal claims over payments and delays.

Arguments Presented

The petitioner's case centered on the persistence of the underlying disputes despite the first arbitration. Represented by Mr. Azhar-ul-Amin, they argued that the Commercial Court's set-aside order under Section 34 explicitly left room for fresh arbitral proceedings, as no merits adjudication had occurred. The award's annulment on procedural and policy grounds, rather than substantive evaluation, meant the claims—rooted in the 2008 agreement—remained live and arbitrable. They emphasized that Section 11 at the pre-award stage involves only prima facie scrutiny of the arbitration agreement's existence and dispute arbitrability, not a deep dive into prior proceedings. Citing the Bombay High Court's decision in Batliboi Environmental Engineering Ltd. v. Hindustan Petroleum Corporation Ltd. (Arbitration Application No. 338 of 2024, decided March 11, 2025), they contended that setting aside an award without merits findings restores parties to their pre-award position, enabling a second reference to ensure complete resolution.

In opposition, Mr. Waseem Gull, representing the ERA, urged dismissal, asserting that the Section 11 jurisdiction differs post-award. They highlighted the arbitrator's prior rejection of most claims as frivolous and unsubstantiated after full evidentiary consideration, rendering them "deadwood" unfit for revival. The set-aside under Section 34, even without explicit merits findings, could not revive untenable claims, especially since the Commercial Court did not overturn the arbitrator's substantive rejections. Allowing a second bite at arbitration would undermine finality and encourage endless litigation, contrary to the Act's objectives. They relied on the Delhi High Court's ruling in Jaiprakash Associates Ltd. v. NHPC Ltd. (2025 SCC OnLine Del 170), where a second reference was denied for claims already deemed non-arbitrable on merits, emphasizing the referral court's duty to prevent manifest injustice and resource wastage at the post-award stage.

The respondents further argued that the petitioner's claims, particularly those involving flood damages and delays, lacked legal foundation post the first award's scrutiny, and re-arbitration would only prolong a dispute already analyzed exhaustively.

Legal Analysis

Justice Sanjay Dhar's judgment meticulously navigates the nuanced jurisprudence on second references under the Arbitration Act, distinguishing between pre-award and post-award judicial scrutiny. At the pre-award stage, courts apply a "prima facie" test limited to the arbitration agreement's validity and dispute arbitrability, rejecting references only for "manifest non-arbitrability." However, post-award—after a Section 34 set-aside—courts must consider the prior award, the set-aside order, and any Section 37 appellate decisions to assess if underlying disputes remain unresolved.

The court extensively referenced Jaiprakash Associates Ltd. v. NHPC Ltd. , where the Delhi High Court barred a second reference, viewing it as pursuing "deadwood" claims already adjudicated on merits without challenge to the set-aside findings. There, the arbitral tribunal had found no evidentiary basis for claims yet awarded damages, leading to a set-aside that became final sans appeal—rendering revival an abuse of process and threat to the Act's speedy justice mandate.

In contrast, the Bombay High Court in Batliboi Environmental Engineering Ltd. v. Hindustan Petroleum Corporation Ltd. distinguished Jaiprakash , allowing a second reference where a Supreme Court upheld a Section 37 set-aside without opining on merits, restoring parties to pre-award status. Justice Dhar adopted this reasoning, noting that Jaiprakash involved exceptional circumstances like unchallenged merits findings, absent here.

The analysis pivoted to the Supreme Court's guidance in McDermott International Inc. v. Burn Standard Co. Ltd. ((2006) 11 SCC 181), which limits court intervention to ensuring fairness (e.g., fraud, bias, natural justice violations) without correcting arbitral errors. Quashing an award leaves parties free to re-arbitrate if desired, minimizing supervisory overreach to uphold arbitration's expediency and finality.

Applying these principles, the court scrutinized the Commercial Court's April 24, 2025, order. It set aside the award based on both parties' concessions regarding procedural lapses—non-appreciation of contract terms, statutory violations, natural justice breaches, lack of mind application, and public policy conflicts—without independent merits evaluation. Even the lone allowed claim (No. 7) was not substantively reassessed. The order's explicit non-prejudice to future arbitration reinforced unresolved status. With no Section 37 appeal, finality attached only to the set-aside, not merits.

This distinction clarifies key concepts: set-aside on procedural/public policy grounds (Sections 34(2)(b)) differs from merits-based rejection under Section 34(2)(a), where claims become non-arbitrable. Here, the absence of merits adjudication preserved arbitrability, aligning with the Act's pro-arbitration tilt post-amendments.

The petitioner urged a technically skilled arbitrator given the construction disputes, but the court deemed issues more factual/legal—requiring evidence appreciation—favoring a judicially trained one. Clause 20.6 GCC's arbitration provision remained operative, covering all disputes.

This reasoning integrates insights from external sources, such as reports on the judgment emphasizing its role in preventing "deadwood" revivals while enabling fresh starts for bona fide disputes, enhancing clarity for infrastructure arbitration in regions like J&K.

Key Observations

The judgment is replete with pivotal excerpts illuminating the court's rationale. Key observations include:

• On the scope of post-award scrutiny: "It is a well settled principle of law that at the pre-award stage, the Court's scrutiny is extremely limited and the Court applies only a prima facie test about the existence of arbitration agreement and arbitrability of the disputes arising between the parties. ... However, when a fresh petition under Section 11 of the Act of 1996 is made after the arbitral award has been set aside, the Court has to consider the award passed by the Arbitrator and the order that has been by the Court under Section 34 of the Act 1996..."

• Distinguishing precedents: "The High Court of Delhi has, in the case of Jaipraksh Associates Limited (supra)... analysed the legal position... [where] the arbitral tribunal had clearly ruled that the party seeking the second round of arbitration had no legs to stand on. ... This is totally different from the facts at hand."

• On Supreme Court guidance: "The Supreme Court has, in the case of McDermott International Inc. vs Burn Standard Co. Ltd. & Ors. (2006) 11 SCC 181 held as under: ... The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired."

• On the set-aside order's effect: "From the afore-quoted order of the learned Designated Commercial Court, it is clear that the award of the Arbitral Tribunal has been set aside on the grounds that both the parties contend that the said award has been passed without appreciating the relevant provisions of the agreement... The learned Designated Commercial Court has not considered the findings of the learned Arbitrator on their merits..."

• Final maintainability: "In view of the foregoing facts and circumstances of the case... the underlying disputes between the parties have remained unresolved, therefore, the present petition filed by the petitioner seeking reference of disputes to arbitration... is required to be allowed..."

These quotes encapsulate the balance between judicial restraint and dispute resolution efficacy.

Court's Decision

The High Court allowed the petition, appointing Hon'ble Shri Justice M. K. Hanjura, former Judge of the court, as the sole arbitrator to adjudicate all disputes and differences arising from the 2008 agreement. The order mandates: communication of a copy to the arbitrator within ten days; submission of a statutory disclosure under Sections 11(8) and 12(1) within two weeks; parties to appear as fixed by the arbitrator; and equal sharing of arbitral costs, subject to the final award.

Practically, this restores the parties to a fresh arbitral forum, allowing re-examination of the ten claims and three counterclaims without prejudice from prior findings. The arbitrator's judicial background ensures rigorous evidentiary handling, potentially expediting resolution given the technical-legal mix.

Implications are profound for future cases. It reinforces that Section 34 set-asides on non-merits grounds (e.g., procedural errors, public policy) do not bar second references, preventing claims from becoming "deadwood" prematurely. This promotes arbitration's role in complex contracts like public infrastructure, where delays and external events (e.g., floods) often spawn disputes. For legal professionals, it signals heightened scrutiny in Section 11 petitions post-award, urging careful appeals under Section 37 to solidify merits positions.

Broader effects include bolstering investor confidence in J&K's reconstruction projects by ensuring accessible dispute mechanisms, reducing litigation backlog, and aligning with UNCITRAL Model Law principles embedded in the 1996 Act. However, it cautions against using set-asides to game the system, as courts will probe for unresolved disputes. In an era of rising arbitration caseloads—over 1,000 institutional cases annually in India—this ruling fosters efficiency, potentially influencing similar disputes in sectors like power and transport. Ultimately, it upholds the Act's ethos: arbitration as a swift, fair alternative, with courts as minimal interveners.

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