The Madhya Pradesh High Court has clarified that claims for payment of work performed under a terminated contract remain arbitrable, even when the termination itself is excluded from arbitration under contractual exceptions. This ruling reinforces the principle that courts must not prematurely adjudicate the arbitrability of specific claims at the Section 11 stage, leaving such determinations to the arbitral tribunal.
Background & Facts
The Dispute
The applicant, M/s Amar India Pvt. Ltd., a private company engaged in sanitation and cleaning services, entered into a contract with Western Railway Ratlam Division through the Government e-Marketplace (GeM) on 14.07.2023. The contract, valued at Rs.2,81,14,362.30, was for mechanised and manual cleaning services at Ujjain Railway Station for a period of four years, commencing on 28.07.2023 and ending on 27.07.2027.
Key Facts
The contract was governed by the General Conditions of Contract for Services (GCC) under Indian Railway Arbitration Rules
The applicant received payments for services rendered up to 27.02.2024
On 23.07.2024, the respondent deducted Rs.3,98,791/- as penalty, claiming performance deficiencies
The applicant contested the penalty, asserting that its performance score (85%-100%) rendered penalties impermissible under Clause 4.17.1 of GCC
On 20.09.2024, the respondent issued a termination notice under Clause 7.4.3 of GCC, citing persistent non-compliance
The termination notice also imposed a two-year debarment from participating in future Railway tenders
The applicant invoked arbitration on 23.09.2024, seeking adjudication of outstanding dues totaling Rs.1,54,20,676/-
The respondent, on 16.12.2024, indicated willingness to proceed with arbitration but conditioned it on the applicant waiving Sections 12(5) and 31A(5) of the Arbitration and Conciliation Act, 1996
The applicant refused to waive these provisions on 23.01.2025, leading to the respondent’s refusal to nominate an arbitrator
Procedural History
14.07.2023: Contract executed via GeM for cleaning services at Ujjain Station
23.07.2024: Performance notice issued; penalty of Rs.3,98,791/- deducted
03.08.2024: Applicant’s first reply to performance notice
13.08.2024: Second notice issued directing improvement within 7 days
18.08.2024: Detailed representation submitted by applicant
06.09.2024: Third notice issued
10.09.2024: Applicant’s reply to third notice
20.09.2024: Termination notice issued under Clause 7.4.3 of GCC; debarment imposed
23.09.2024: Arbitration invoked under Clause 8 of GCC
25.09.2024: Respondent corrected notice to reflect "Western Railway Ratlam Division"
16.12.2024: Respondent informed applicant that arbitrator nomination was approved, subject to waiver of Sections 12(5) and 31A(5)
23.01.2025: Applicant refused waiver
22.01.2026: Application under Section 11(6) filed before Madhya Pradesh High Court
04.05.2026: Judgment pronounced
Relief Sought
The applicant sought appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, to adjudicate claims for:
Payment for work performed from 29.07.2023 to 20.09.2024
Refund of illegally deducted penalty of Rs.12,28,000/-
Reimbursement for cleaning materials and machinery
Interest at 18% on outstanding amounts
Stay on encashment of performance guarantee
Stay on issuance of fresh tenders pending arbitration
The Legal Issue
The central question was whether claims for payment of work performed, arising from a contract terminated under Clause 7.4 of the GCC, are excluded from arbitration by virtue of Clause 8.1’s exception for "excepted matters," or whether such claims remain arbitrable despite the termination being non-arbitrable.
Arguments Presented
For the Appellant/Petitioner
The applicant’s counsel argued that the arbitration notice did not challenge the termination itself but sought adjudication of outstanding payments for services rendered. Reliance was placed on Clause 7.5 of the GCC, which provides a mechanism for determining and certifying payments due after termination, and emphasized that Clause 7.5 is not listed among the "excepted matters" under Clause 8.1. The applicant cited M/s Aishwarya Enterprises v. Union of India (AC No.21/2024) as a coordinate bench precedent where similar claims were referred to arbitration. It was further submitted that the respondent’s initial willingness to proceed with arbitration, subject to waiver of Section 12(5), demonstrated an implicit acceptance of arbitrability.
For the Respondent/State
The respondent contended that Clause 7.4, which governs termination for default, is expressly excluded from arbitration under Clause 8.1. Since the termination notice was issued under Clause 7.4.3, the entire dispute - including claims for payment - was deemed non-arbitrable. The respondent relied on Emmar India Limited v. Tarun Aggarwal Project LLP (2023) 13 SCC 661, arguing that courts must examine the nature of the dispute at the Section 11 stage and exclude matters clearly barred by contract. The respondent maintained that Clause 7.5 does not create an independent arbitrable claim but merely outlines a procedure for payment determination, which remains subject to the Railway’s final decision under the excepted matters.
The Court's Analysis
The Court undertook a detailed textual analysis of the GCC, particularly Clauses 7.1, 7.2, 7.4, and 7.5, in conjunction with Clause 8.1. It observed that while termination under Clause 7.4 is an "excepted matter," Clause 7.5 provides a distinct mechanism for determining payment due to the contractor after termination. Crucially, Clause 7.5 is not enumerated among the exceptions in Clause 8.1, indicating that payment claims arising from performance prior to termination are not excluded from arbitration.
"It is clear that the payment of any services or related to contract in any manner has to be done in accordance with the procedure provided in clause 7.5 and significantly this clause is not covered under the excepted matters in clause 8.1 (Arbitration clause)."
The Court further emphasized the statutory mandate under Section 11(6A) of the Arbitration and Conciliation Act, 1996, which limits judicial scrutiny at the appointment stage to the prima facie existence of an arbitration agreement. The Court noted that the 2015 amendment, though unnotified, remains in force and bars courts from delving into the arbitrability of specific claims. The Court cited Office for Alternative Architecture v. Ircon Infrastructure & Services Ltd. (2025 SCC OnLine SC 1098), which held that courts must not bifurcate claims into arbitrable and non-arbitrable parts at the Section 11 stage.
"The correct course for the High Court was to leave it open to the party to raise the issue of non-arbitrability of certain claims before the arbitral tribunal, which, if raised, could be considered and decided by it."
The Court also rejected the respondent’s attempt to condition arbitration on waiver of Section 12(5), noting that such a condition, when unilaterally imposed, defeats the statutory framework for appointment of arbitrators. The refusal to waive did not negate the existence of an arbitration agreement but merely created a procedural impasse, which Section 11 was designed to resolve.
The Verdict
The applicant succeeded. The Madhya Pradesh High Court appointed Shri Justice Duppala Venkata Ramana (Retd.), former Judge of the Madhya Pradesh High Court, as the sole arbitrator. The Court directed the Principal Registrar to obtain the required declaration under Section 11(8) and Section 12(1) of the Arbitration and Conciliation Act, 1996, before the next hearing on 07.05.2026. The arbitrator is empowered to determine the arbitrability of all claims, including those related to termination and debarment, while adjudicating the payment dispute of Rs.1,54,20,676/-.
What This Means For Similar Cases
Payment Claims Survive Termination Exceptions
Practitioners must now argue that claims for payment of work performed prior to termination are separable from the termination itself, even if the termination clause is non-arbitrable
Clause 7.5-type provisions, which provide for post-termination payment certification, create independent arbitrable rights
Contractual exclusions must be explicitly linked to the claim in question; blanket exclusions of "all matters arising from termination" are insufficient
Judicial Restraint at Section 11 Stage Is Mandatory
Courts must confine scrutiny under Section 11 to the existence of a prima facie arbitration agreement
Any attempt to dissect claims into arbitrable and non-arbitrable portions at this stage is contrary to In Re: Interplay and Ircon
Parties must raise non-arbitrability defenses before the arbitral tribunal, not the court
Waiver Conditions Cannot Override Statutory Appointment Mechanism
Conditioning arbitrator appointment on waiver of statutory provisions like Section 12(5) is impermissible
Refusal to waive does not invalidate the arbitration agreement; it triggers the court’s duty to appoint under Section 11(6)
Such conditions are procedural hurdles, not substantive bars to arbitration
