The Chhattisgarh High Court has reaffirmed that the existence of a valid arbitration agreement overrides prior interim orders staying contractual termination, provided the parties have not extinguished their right to arbitrate. This decision reinforces the pro-arbitration stance of Indian courts under the Arbitration and Conciliation Act, 1996, and clarifies that judicial stays do not nullify contractual arbitration clauses.
Background & Facts
The Dispute
The dispute arose from a Railway Siding Agreement dated 10.05.2023, under which KMAG International was appointed to operate and maintain a railway siding for Nova Iron and Steel Limited. The agreement imposed obligations on KMAG to comply with environmental and railway safety norms. After an Environment Conservation Board notice in July 2023 identified non-compliance, Nova terminated the agreement on 19.08.2023, alleging breach. KMAG challenged the termination before the Commercial Court, which stayed the termination, holding that the violations occurred before KMAG took possession.
Procedural History
- 19.08.2023: Nova issued termination notice citing environmental non-compliance.
- 07.09.2023: Commercial Court stayed termination, ruling KMAG not liable for pre-possession violations.
- 13.12.2023: Chhattisgarh High Court dismissed Nova’s appeal against the stay order.
- 06.02.2024: KMAG invoked arbitration under Clause 15 of the Agreement.
- 17.09.2024: Court appointed Justice (Retd.) V.K. Shrivastava as Sole Arbitrator.
- 22.02.2025: Nova issued a second termination notice citing continued breaches - including rent default and safety failures post-stay.
- 20.05.2025: Both parties filed Section 9 applications before Commercial Court, Raipur, which were disposed of.
- 01.03.2025 & 16.08.2025: Nova invoked arbitration under Section 21 of the Act, seeking recovery, damages, and declaration of breach.
Relief Sought
Nova seeks appointment of the arbitrator to adjudicate claims for: (a) recovery of unpaid rent of Rs. 3,05,08,310/-; (b) declaration of KMAG’s breach of agreement post-stay; (c) damages for reputational harm, lost profits, and penalties incurred; and (d) reimbursement for fines and reparations.
The Legal Issue
The central question was whether the prior stay order on termination of the agreement under Section 9 of the Arbitration and Conciliation Act, 1996, extinguished the parties’ right to invoke arbitration under Clause 15 of the Agreement, or whether the arbitration clause remained enforceable despite interim judicial intervention.
Arguments Presented
For the Appellant (Nova Iron and Steel Limited)
Nova argued that the arbitration clause in Clause 15 of the Agreement was clear, unambiguous, and binding. It emphasized that the stay order only preserved the status quo pending arbitral determination - it did not nullify the arbitration agreement. Nova relied on Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. to assert that interim relief under Section 9 does not oust the jurisdiction of the arbitral tribunal. It further contended that subsequent breaches - including non-payment of rent since May 2024, fabrication of documents, and derailment caused by poor maintenance - constituted fresh grounds for arbitration, independent of the initial dispute.
For the Respondent (KMAG International)
KMAG did not contest the existence of the arbitration clause. It acknowledged receipt of Nova’s arbitration notice and consented to adjudication by Justice (Retd.) V.K. Shrivastava. KMAG’s position was effectively neutral: it neither opposed arbitration nor challenged jurisdiction, thereby tacitly accepting the enforceability of the arbitration agreement.
The Court's Analysis
The Court examined the language of Clause 15, which mandates arbitration for any dispute arising under the Agreement, with seat in Raipur and English as the language. The Court noted that the prior stay order under Section 9 was an interim measure to preserve the subject matter of the dispute, not a determination on the merits of termination or the validity of the arbitration clause. The Court emphasized that Section 11(6) of the Act empowers the Court to appoint an arbitrator when a party fails to act under the arbitration agreement, and that such appointment is not barred by prior judicial orders unless the arbitration agreement itself is void, inoperative, or incapable of being performed.
"The stay granted under Section 9 does not operate as a judicial determination that the arbitration clause is inapplicable or that the dispute is no longer arbitrable. It merely preserves the status quo pending arbitral adjudication."
The Court further held that the subsequent breaches - including non-payment of rent, fraudulent documentation, and operational failures post-stay - constituted new and distinct disputes falling squarely within the scope of Clause 15. The Court rejected any notion that the earlier stay order had rendered the arbitration agreement obsolete. It reaffirmed the principle from Vidya Drolia v. Durga Trading Corporation that arbitration agreements are to be interpreted broadly and enforced unless clearly inoperative.
The Verdict
Nova Iron and Steel Limited succeeded. The Court held that the arbitration clause in Clause 15 of the Agreement remains valid and enforceable, and that the prior stay order did not extinguish the parties’ right to arbitrate. The Court appointed Justice (Retd.) V.K. Shrivastava as Sole Arbitrator to adjudicate all disputes, including those arising after the stay order.
What This Means For Similar Cases
Arbitration Clauses Survive Interim Stays
- Practitioners must argue that interim relief under Section 9 preserves the subject matter, not the validity of the arbitration agreement.
- A stay order does not constitute a judicial finding that the dispute is non-arbitrable.
- Fresh breaches occurring after a stay order create new arbitrable disputes.
Party Consent Streamlines Arbitrator Appointment
- When parties jointly agree on a retired judge as arbitrator, courts will expedite appointment under Section 11(6).
- No need to litigate arbitrator selection if parties reach consensus - this reduces delay and reinforces party autonomy.
Post-Stay Breaches Are Arbitrable
- Non-payment of rent, safety violations, and document fraud occurring after a stay order are independent breaches.
- These can be raised in arbitration even if the original dispute was stayed.
- Practitioners should document all post-stay breaches meticulously to establish separate grounds for arbitration.
