Arbitration and Conciliation Act 1996 : s. 11(6) – Constitution of arbitral tribunal – Arbitiability of the dispute – Contract between the parties – Successful completion of work by SPML and issuance of completion certificate by NTPC – NTPC released the final payment – However, NTPC withheld SPML’s Bank Guarantees with respect to other projects – In turn, SPML raised a claim against NTPC, and thereafter, filed writ petition seeking release the Bank Guarantees – During pendency, the parties arrived at a Settlement Agreement and in compliance thereof, NTPC released the Bank Guarantees and SPML withdrew the writ petition – After one month, SPML filed the arbitration petition u/s. 11(6) alleging coercion and economic duress in the execution of the Settlement Agreement – High Court allowed the same – On appeal held: No allegations of coercion or economic duress compelling SPML to withdraw any pending claims under the subject contract as a condition for the return of the Bank Guarantees – Only allegation by SPML was with respect to NTPC’s illegal action of interlinking the release of the Bank Guarantees with some other contracts –Allegations of coercion and economic duress not bona fide, and that there were no pending claims between the parties for submission to arbitration – Claim of SPML was an attempt to initiate ex facie meritless, frivolous and dishonest litigation – High Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation – It should have exercised the restricted and limited review to check and protect parties from being forced to arbitrate – High Court erred in allowing the application u/s. 11(6), thus, the decision of the High Court set aside.
s. 11(6) – Pre-referral jurisdiction of the courts u/s. 11(6) – Scope of – Held: Is very narrow and inheres two inquiries – Primary inquiry is about the existence and the validity of an arbitration agreement and the secondary inquiry is with respect to the nonarbitrability of the dispute at the reference stage – Standard of scrutiny to examine the non-arbitrability of a claim is only prima facie – Limited scrutiny, through the eye of the needle, is necessary and compelling – If this duty within the limited extent is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court – Thus, this Court or a High Court, while exercising jurisdiction u/s. 11(6) not expected to act mechanically merely to refer a purported dispute raised by an applicant to the chosen arbitrator.
Allowing the appeal, the Court
HELD: 1.1 The pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non arbitrability of the dispute. [Para 25][862-E-F]
1.2 As a general rule and a principle, the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer, the referral court may reject claims which are manifestly and ex-facie non-arbitrable. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves. This also requires the courts to examine whether the assertion on arbitrability is bona fide or not. The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the other hand, even if there is the slightest doubt, the rule is to refer the dispute to arbitration. [Paras 26, 27][862-G; 863-C-E]
1.3 The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the referral court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. It has been termed as a legitimate interference by courts to refuse reference in order to prevent wastage of public and private resources. Further, as noted in Vidya Drolia’s case, if this duty within the limited compass is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court. Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator. [Para 28][863-E-F; 864-A]
2.1 A simple narration of the bare fact leads to conclude that the allegations of coercion and economic duress are not bona fide, and that there were no pending claims between the parties for submission to arbitration. The respondent’s claim fits in the description of an attempt to initiate “ex facie meritless, frivolous and dishonest litigation” [Para 44][867-D]
2.2 The whole dispute revolves around the solitary act of the Appellant, NTPC, in not returning the Bank Guarantees despite the successful completion of work. This continued even after SPML issued the No-Demand Certificate and NTPC released the final payment. These undisputed facts led to the institution of the Writ Petition before the Delhi High Court. There were no allegations of coercion or economic duress compelling SPML to withdraw any pending claims under the subject contract as a condition for the return of the Bank Guarantees. On the contrary, the only allegation by SPML was with respect to NTPC’s “illegal” action of interlinking the release of the Bank Guarantees with some other contracts. This was precisely the argument before the High Court, and, in fact, this submission is recorded by the High Court while issuing notice and injuncting NTPC. This fact clearly indicates that the plea of coercion and economic duress leading to the Settlement Agreement is an afterthought. [Para 45][867-E-G]
2.3. It was during the subsistence of the Writ Petition and the High Court’s interim order, when SPML had complete protection of the Court, that the parties entered into the Settlement Agreement. This agreement was comprehensive. It inter alia provided for the release of Bank Guarantees by NTPC, the withdrawal of SPML’s Writ Petition, restraining NTPC from filing contempt proceedings against SPML for letting the Bank Guarantees expire, and finally, restraining SPML from initiating any proceedings under the subject contract, including arbitration. The Settlement Agreement also recorded that there were no subsisting issues pending between the parties. [Para 46][868-AC]
2.4. After reaping the benefits of the Settlement Agreement, the Writ Petition was withdrawn on 21.09.2020. It is thereafter that the present application under Section 11(6) of the Act was filed. The sequence of events leads to conclude that the letter of repudiation was issued only to wriggle out of the terms of the Settlement Agreement. Thus, it is clarified that the claims sought to be submitted to arbitration were raised as an afterthought. Further, SPML’s allegations of coercion and economic duress in the execution of the Settlement Agreement lack bona fide. They are liable to be knocked down as ex facie frivolous and untenable. [Paras 47 and 48][868-E-G]
2.5. This is a case where the High Court should have exercised the prima facie test to screen and strike down the exfacie meritless and dishonest litigation. These are the kinds of cases where the High Court should exercise the restricted and limited review to check and protect parties from being forced to arbitrate. Thus, the High Court erred in allowing the application under Section 11(6) of the Act. The High Court ought to have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia’s case. Thus, the decision of the High Court is set aside. [Paras 49-51][868-GH; 869-A-B]
Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1 – relied on.
Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714 : [2019] 12 SCR 123; Duro
Felguera, S.A. v. Gangavaram Port Ltd. (2017) 9 SCC
729 : [2017] 10 SCR 285; Sanjiv Prakash v. Seema Kukreja and Ors. (2021) 9 SCC 732; Oriental
Insurance Co. Ltd. and Anr. v. Dicitex Furnishing Ltd. (2020) 4 SCC 621 : [2019] 14 SCR 389; Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr 2022 SCC OnLine SC 1328; National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd (2009) 1 SCC 267 : [2008]
13 SCR 638; Union of India & Ors. v. Master
Construction Co. (2011) 12 SCC 349 : [2011] 5 SCR 853; New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. (2015) 2 SCC 424 : [2014] 12 SCR 360; United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362 : [2019] 5 SCR 521; Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd. (2021) 5 SCC 671; Sanjiv Prakash v. Seema Kukreja and Ors. (2021) 9 SCC 732; Indian Oil Corporation Ltd. v. NCC Ltd. (2022) SCC OnLine SC 896; BSNL and Anr. v. Nortel Networks India (P) Ltd. (2021) 5 SCC 738; Secunderabad Cantonment Board v. B. Ramachandraiah & Sons (2021) 5 SCC 705; DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd 2021 SCC OnLine SC 781 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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