Settlement With Concessionaire Doesn't Erase NHAI's Role In Dispute: Delhi High Court Dismisses Substitution Petition

The Delhi High Court refused to interfere with an arbitral tribunal's order rejecting the plea of National Highways Authority of India's (NHAI) to substitute itself with a special purpose vehicle (SPV) in an ongoing arbitration initiated by CFM Asset Reconstruction Pvt. Ltd. (CFM ARC). The court held that the substitution could prejudice claimants' rights and that court's intervention under Article under 227 of the Indian Constitution is permitted only in exceptional rarity. Justice Girish Kathpalia held that the dispute against NHAI must continue despite its conciliation settlement with the concessionaire (the SPV) as CFM ARC was not a party to that settlement and cannot be bound it. IL&FS was given a contract to design, finance, construct and maintain a stretch of National Highway 8B. A concessionaire (SPV) was formed to execute the project that was funded by senior leader. The NHAI terminated the concessionaire agreement and took possession of the project. Both concessionaire and lenders challenged the termination of the agreement before the NCLAT and later under section 9 of the Arbitration Act. The court directed conciliation between parties before arbitration. During this process, the lenders assigned their rights to CFM ARC which initiated arbitration against NHAI stating wrongful termination. NHAI sought its substitution under Order XXII Rule 10 CPC with the concessionaire based on the conciliation approved by the NCLT. It argued that its liability had been transferred to the SPV and if the arbitration is continued, it would undermine the sanctity of the settlement. It was further argued that the SPV was a property to defend the claim. However, the arbitral tribunal rejected the application prompting the NHAI to file present petition under Article 227 of the Constitution. Opposing the petition, CFM ARC argued that since it was not a party to the conciliation settlement, it cannot be bound by it. It was further argued that the arbitration before the Arbitral Tribunal arose out of the Concession Agreement and not Substitution Agreement, so the application was liable to rejected. It was further argued that the concept of substitution of parties does not apply to arbitration proceedings, because the same are based on arbitration agreement. It was further argued that one can assign only the benefits and not the liabilities. The court refused to interfere with the order holding that the petition failed to demonstrate patent lack of jurisdiction, perversity or bad faith, the only grounds on which the court can interfere under Article 227. The court observed that “the jurisdiction under Article 227 of the Constitution of India can be invoked by this court against dismissal of an application under Section 16 of the Act where there is a patent lack of jurisdiction, or a manifest miscarriage of justice, or where the order under scrutiny is completely perverse and illegal order.” The court further observed that the conciliation was never mandatory and CFM ARC was not a party to it. Therefore, a settlement agreement between the NHAI and the concessionaire cannot bind the CFM ARC. A transfer of liabilities through that settlement cannot affect a claimant who was not involved unless the concessionaire steps into the proceedings and assumes liability. The court further observed that the NHAI wanted to substitute itself with the concessionaire and not merely addition. Therefore substitution could prejudice CFM ARC as the concessionaire may lack of full knowledge of claims and liabilities risking failure of the arbitration itself. The court further observed that allowing substitution would further expand scope of the disputes to included issues between NHAI and SPV frustrating arbitration. It held that “if the application is allowed, it would widen the scope of the dispute pending before the Arbitral Tribunal to cover not just the disputes pending between the present petitioner and the present respondent no.1, but also between the present petitioner and the present respondent no.2 as well.” Accordingly, the court dismissed the petition holding that any agreement between the non-claimant and a stranger to the arbitration as regards transfer of liabilities cannot bind the claimant. Case Title: NATIONAL HIGHWAYS AUTHORITY OF INDIA versus CFM ASSET RECONSTRUCTION PVT LTD & ANRCitation: 2025 LiveLaw (Del) 1608 Case Number: CM(M) 2031/2025 & CM APPL. 65908/2025 Judgment Date: 26/11/2025 For Petitioner: Mr. Tushar Mehta, Solicitor General of India with Mr. Nishant Awana, Ms. Rini Badoni, Ms. Rebecca Mishra and Ms. Ekta Kundu, Advocates. For Respondents: Mr. Saurabh Kirpal, Senior Advocate with Mr. Atul Shanker Mathur, Ms. Priya Singh, Mr. Shubhankar, Mr. Rajat Choudhary and Mr. Junaid, Advocates. Mr. Raunak Dhillion, Mr. Nihaad Dewan, Mr. Akshay Gupta and Ms. Isha Malik, Advocates for R2 Click...

Settlement With Concessionaire Doesn't Erase NHAI's Role In Dispute: Delhi High Court Dismisses Substitution Petition

Mohd Malik Chauhan

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