Article

In a recent case decided by the Hon’ble Supreme Court, in a dispute between M/S SPML Infra Ltd. (“Contractor”) and NTPC Ltd. (“NTPC”), the Court once again went into the analysis and scope of pre-referral jurisdiction of the High Court under Section 11 of the Act. The dispute had arisen when after the completion of work assigned through the contract, NTPC withheld the bank guarantees on account of pending liabilities and disputes between the parties with respect to other projects. When the Contractor approached the High Court, the parties entered into a settlement agreement wherein NTPC agreed to release the withheld Bank Guarantees. The Contractor as per the settlement agreed to withdraw its pending Writ Petition and undertook not to initiate any other proceedings, including arbitration, under the subject contract. Subsequently, the Bank Guarantees were released by NTPC.

The Contractor, however, repudiated the Settlement Agreement and filed the present application under Section 11(6) of the Act in the Delhi High Court alleging coercion and economic duress in the execution of the Settlement Agreement. The High Court appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC, and directed the respective arbitrators to appoint the presiding Arbitrator.

NTPC approached the Apex Court. The Supreme Court at the outset clarified that position of law with respect to the pre-referral jurisdiction, as it existed before the advent of Section 11(6A) in the Act, was based on principle laid down in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd [(2009) 1 SCC 267]. In Boghara Polyfab it was held that “the issue of non-arbitrability of a dispute will have to be examined by the court in cases where accord and discharge of the contract is alleged.” Further in the matter of Union of India & Ors. v. Master Construction Co. 2011) 12 SCC 349 it was held that “Where the dispute raised by the claimant with regard to validity of the discharge voucher or no-claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all”. The Court had held that in such cases the Court must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine.

In a legislative response to these precedents, sub-section (6A) was added to Section 11 of the Act wherein while considering any application for appointment of arbitral tribunal, the Courts were to confine to the examination of the existence of an arbitration agreement. Section 11(6A) was strictly construed in the case of Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]. It was held that the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. The position of law was however changed in the matter of United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362 wherein the scope of examination was widened. The provision was finally interpreted Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1. It was held that the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in the judgment. Further it was held that the restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested.” The Court observed that conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable. When it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal.

On reviewing the precedents, the Court concluded that the general rule is that the inquiry by the court must be prima facie, however, such 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 contrary, even if there is the slightest doubt, the rule is to refer the dispute to arbitration. Applying the law to the fact of the case, the Court found that there were no pending claims between the parties for submission to arbitration. Since entire dispute revolves around the solitary act of the NTPC, in not returning the Bank Guarantees despite the successful completion of work, the plea of coercion and economic duress must be seen in the context of the execution of the Settlement Agreement not being disputed, and its implementation leading to the release of the Bank Guarantees which also was not being disputed. The Court held that 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. The Court allowed the appeal and disposed the matter in favour of NTPC.