Counterclaims in Arbitration: Calcutta High Court fixes an outer limit tied to “framing of issues,” with rare leeway until commencement of claimant’s evidence

Introduction

In Gayatri Granites & Ors v. Srei Equipment Finance Ltd. (2025 CHC-AS 1698), the Calcutta High Court (per Hiranmay Bhattacharyya, J.) answered a recurring procedural question in Indian arbitration: how late in the proceedings can a respondent bring a counterclaim? The petition arose under Article 227 of the Constitution challenging an arbitral tribunal’s order refusing a late amendment to the Statement of Defence (SoD) to introduce a counterclaim. The Court has now articulated a clear temporal threshold for counterclaims in arbitration, harmonizing Section 23 of the Arbitration and Conciliation Act, 1996 (the 1996 Act) with civil procedure principles and the statutory timelines for arbitral pleadings and awards.

The parties were engaged in a finance-arbitration arising from a master facility agreement. The claimant (Srei Equipment Finance Ltd.) filed its Statement of Claim (SoC). The respondents (Gayatri Granites & Ors) filed their SoD, evidence was led, and only after the claimant’s evidence had concluded did the respondents seek to amend the SoD to add a counterclaim alleging, inter alia, that their loan account stood closed and no dues remained.

The arbitral tribunal rejected the amendment. The respondents invoked the High Court’s supervisory jurisdiction under Article 227 to overturn that procedural order. The High Court refused to interfere and, in doing so, laid down an important procedural rule governing the timing of counterclaims in arbitration.

Summary of the Judgment

• The Court held that, although Section 23(2A) of the 1996 Act enables a respondent to file a counterclaim, the filing cannot be permitted indefinitely. Borrowing from Supreme Court jurisprudence under the Code of Civil Procedure (CPC), the Court fixed an outer limit in arbitral proceedings:
• Core holding (new rule): A counterclaim in an arbitration should not be allowed after issues are framed, and only in exceptional cases can it be permitted until the commencement of recording of the claimant’s evidence.
• On facts, the counterclaim was sought much later—after the claimant’s evidence had closed. The arbitrator had found no supervening events, and the delay was unexplained. Allowing the amendment would prejudice the claimant and disrupt statutory timelines. The refusal to amend was upheld.
• Article 227 review of interlocutory arbitral orders remains tightly circumscribed. Absent perversity or jurisdictional error, the High Court will not intervene. None was found.
• Result: The civil revisional application (C.O. 2449 of 2025) was dismissed; no order as to costs.

Key Issues

• Does Section 23(2A) of the 1996 Act permit a respondent to introduce a counterclaim at any time during arbitration?
• What is the applicable temporal cut-off for counterclaims in arbitration, and how does it align with CPC principles and the 1996 Act’s timelines?
• When can a High Court interfere under Article 227 with an arbitral tribunal’s procedural order refusing an amendment/counterclaim?

Detailed Analysis

Statutory framework and the Court’s synthesis

• Section 23(1)-(4), 1996 Act:
  • (2A) permits a respondent to submit a counterclaim or set-off within the scope of the arbitration agreement.
  • (3) permits amendment/supplementing of claim or defence during the arbitral proceedings, unless the tribunal considers it inappropriate having regard to the delay.
  • (4) mandates completion of SoC and SoD within 6 months from notice of appointment of the arbitrator(s).
• Section 29A, 1996 Act: timelines for making the award run from completion of pleadings under Section 23(4).
• Section 19, 1996 Act: tribunals are not bound by the CPC, yet parties may agree on procedure; tribunals may adopt procedures they consider appropriate.
• Order VIII Rule 6A CPC: allows counterclaims; restricts when the cause of action must have accrued (on or before the time the defendant delivers the written statement), but does not fix an explicit filing deadline. The Supreme Court has read in an “outer limit” pegged to the framing of issues.

The Court reconciled these sources to conclude that, although Section 23(2A) does not specify a filing deadline for counterclaims, arbitral efficiency (Sections 23(4) and 29A) and fairness necessitate a practical cut-off. It therefore imported the Supreme Court’s “outer limit” principle from civil suits into arbitration.

Precedents cited and their influence

• Ashok Kumar Kalra v. Wing Cdr. Surendra Agnihotri, (2020) 2 SCC 394:
  • Three-judge bench judgment interpreting Order VIII Rule 6A CPC.
  • Held: a counterclaim may be filed after the written statement, but not with substantive delay; the discretionary “outer limit” for filing is until framing of issues (illustrative factors for discretion listed).
  • Justice M.M. Shantanagoudar (partly concurring/dissenting) suggested that, in exceptional cases, a counterclaim may be allowed until the commencement of the plaintiff’s evidence.
  • Application here: The High Court adopted this framework for arbitration, fixing the outer limit at “framing of issues”, with rare leeway until the start of claimant’s evidence. This is the central doctrinal move in the judgment.
• Life Insurance Corporation of India v. Sanjeev Builders Pvt. Ltd., (2022) 16 SCC 1:
  • Establishes liberal principles for amendments where necessary for effective adjudication, provided no prejudice is caused.
  • Application here: distinguished. The Court held that the proposed amendment (to add a counterclaim) at a late stage would cause serious prejudice to the claimant and disrupt the arbitral schedule; delay was unexplained; no supervening facts justified the late change.
• Deep Industries Ltd. v. ONGC, (2020) 15 SCC 706; Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd., (2022) 1 SCC 75; Serosoft Solutions (P) Ltd. v. Dexter Capital Advisors (P) Ltd., (2025) SCC OnLine SC 22:
  • These decisions collectively emphasize minimal judicial interference in arbitral proceedings. Article 227 jurisdiction over interlocutory arbitral orders is to be exercised only in cases of perversity or jurisdictional error and in “exceptional rarity.”
  • Application here: The High Court found the arbitrator’s refusal to allow the amendment neither perverse nor jurisdictionally flawed; thus, Article 227 intervention was unwarranted.
• NTPC Limited (as referred in the judgment):
  • Proposition noted: an order dismissing an application under Section 23(3) is a procedural order and is not an “interim award” amenable to a Section 34 challenge.
  • Application here: Not determinative because the present proceeding was under Article 227 and the substantive issue concerned the temporal permissibility of introducing a counterclaim via amendment.

Legal reasoning

• No statutory filing deadline in Section 23(2A): The text enables counterclaims if within the scope of the arbitration agreement but is silent on timing. The Court read this in harmony with:
  • Section 23(4)’s 6‑month pleading completion deadline; and
  • Section 29A’s award timeline running from the completion of pleadings.
  The composite scheme favors expedition and disfavors late structural changes that would derail the schedule.
• Transposition of CPC principle to arbitration: The Supreme Court’s reading of an “outer limit” under Order VIII Rule 6A (till framing of issues; exceptional leeway till plaintiff’s evidence begins) was held apposite for arbitration as well, especially because many arbitrations do frame issues or a list of issues/terms of reference once pleadings close.
• Section 23(3) discretion tethered to delay and prejudice: While parties may amend claims/defences during the proceedings, the tribunal may refuse if delay makes it inappropriate. On facts, the tribunal found:
  • No subsequent event justified the amendment.
  • The respondents knew all relevant facts earlier; the delay lacked satisfactory explanation.
  • Allowing a counterclaim after the claimant’s evidence closed would cause serious prejudice and hamper the proceedings.
  The High Court endorsed this exercise of discretion.
• Article 227 restraint: Applying Deep Industries/Bhaven Construction/Serosoft Solutions, the Court reiterated that supervisory interference is only for perversity or jurisdictional error. The arbitrator’s order failed neither test.

Impact and implications

This decision brings much-needed clarity to the timing of counterclaims in arbitration and is likely to influence both case management by arbitral tribunals and pleading strategies by parties:

• Practical cut-off in arbitration:
  • General rule: counterclaims should not be entertained after issues are framed.
  • Exceptional leeway: only until commencement of claimant’s evidence, based on demonstrable justification (e.g., genuinely supervening facts) and absent prejudice.
• Incentive for disciplined pleadings: Respondents must evaluate and file counterclaims early—ideally with or before the SoD—or risk being shut out. “Inadvertence” without compelling justification will not suffice.
• Tribunal case management: Tribunals should clarify when “issues” are framed (or adopt a formal “list of issues/terms of reference”) because that marker now carries significant procedural consequences.
• Speed vs. fullness of adjudication: The judgment tilts toward expedition and predictability consistent with Section 23(4) and Section 29A. While that may sometimes lead to separate proceedings for late counterclaims, the Court’s framework prioritizes the statutory imperative of timely awards.
• Judicial review posture: Parties should not expect Article 227 to rescue them from the consequences of late procedural moves before tribunals; absent perversity, such case‑management orders will stand.

Complex Concepts Simplified

• Counterclaim (vs. Set‑off):
  • Counterclaim: an independent claim by the respondent against the claimant, adjudicated within the same proceeding.
  • Set‑off: a defensive plea reducing or extinguishing the claimant’s demand by adjusting cross‑claims, without seeking affirmative relief beyond that adjustment.
• Framing of issues in arbitration:
  • Although not mandated by the CPC, many tribunals identify the “issues for determination” after pleadings close. This can be in the form of “issues,” “terms of reference,” or a procedural order setting out questions to be decided.
  • Under this judgment, that juncture acts as the general cut-off beyond which counterclaims should not be introduced.
• Section 23(2A), 23(3), and 23(4), 1996 Act:
  • 23(2A): permits counterclaims/set‑offs within the arbitration agreement’s scope.
  • 23(3): allows amendments during the proceedings, subject to tribunal’s discretion in light of delay.
  • 23(4): mandates that pleadings (SoC and SoD) be completed within 6 months of arbitrator appointment notice—a key marker for the award timeline under Section 29A.
• Article 227 of the Constitution:
  • A supervisory jurisdiction, not an appellate one. It is invoked only to correct jurisdictional errors or perversity, not to reappraise the merits of routine procedural orders passed by arbitrators.
• Procedural order vs. interim award:
  • A procedural order (e.g., refusing an amendment) manages the process; it is generally not challengeable under Section 34 as an “interim award.”
  • The judgment notes this distinction while emphasizing that Article 227 should likewise not be used to revisit such case‑management decisions absent egregious error.

Application to the case at hand

• Procedural timeline:
  • SoC filed; SoD filed.
  • Claimant’s witness examined and discharged (claimant’s evidence closed).
  • Respondent filed its affidavit‑in‑chief; evidence closed; later sought recall of its witness (allowed).
  • On the recalled date (13 March 2025), respondents moved to amend the SoD to add a counterclaim.
  • The tribunal rejected the amendment on 26 June 2025.
• Why the amendment failed:
  • It came after the claimant’s evidence had concluded—well beyond even the “exceptional” window recognized by the Court.
  • No supervening facts; respondents knew the basis earlier; delay was unexplained.
  • Allowing it would prejudice the claimant and upset the statutory timelines.
• Article 227 challenge:
  • The arbitrator’s order reflected a proper exercise of discretion and statutory balancing.
  • No perversity or jurisdictional error; interference declined.

Practice Pointers

• For respondents in arbitration:
  • Vet and file counterclaims latest by the stage of issue‑framing; aim to file with or before the SoD.
  • If seeking to amend later, prepare to show genuine supervening circumstances, lack of prejudice, and alignment with the procedural calendar.
• For claimants:
  • Insist that the tribunal formally records the “issues for determination” early; this now serves as a critical procedural milestone.
  • Oppose late counterclaims by demonstrating prejudice, disruption to Section 23(4)/29A timelines, and the absence of supervening facts.
• For tribunals:
  • Adopt a clear Procedural Order framing issues/terms of reference soon after pleadings close.
  • When faced with late counterclaims, expressly analyze delay, prejudice, and the statutory timetable (Sections 23(4), 29A) to fortify the exercise of discretion under Section 23(3).

Conclusion

The Calcutta High Court’s decision establishes a robust procedural rule for Indian arbitrations: counterclaims are generally impermissible after issues are framed, with only narrow, exceptional leeway until the commencement of the claimant’s evidence. Grounded in Section 23’s structure and the Supreme Court’s interpretation of counterclaim timing under the CPC, the ruling advances arbitral efficiency by aligning counterclaim practice with statutory timelines for pleadings and awards.

Equally important is the Court’s reaffirmation of restraint in Article 227 review: arbitral case‑management orders will rarely be disturbed. For practitioners, the message is unambiguous—front‑load counterclaims, define issues early, and expect tribunals (and courts) to prioritize speed, discipline, and fairness over late‑stage procedural shifts.