[Raghav Bhatia is an advocate practising at the Supreme Court of India. He can be contacted at [email protected]]
In April this year, the Supreme Court of India in NTPC Ltd. v. SPML Infra Ltd. has expanded the scope of enquiry to be exercised by a court while referring the disputes for arbitration under section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).
Background
NTPC Ltd. and SPML Infra Ltd. had entered into a contract for “Installation Services for Station Piping Package for Simhadri Super Thermal Power Project Stage II at NTPC at Simhadri, Vishakapatnam”. As required under the contract, SPML had furnished bank guarantees in favour of NTPC.
Upon successful completion of the project, NTPC issued a completion certificate in SPML’s favour and informed SPML that it would release the final payment to it “upon the receipt of a No – Demand Certificate from SPML”, which was issued by SPML immediately thereafter. Accordingly, NTPC released the final amount but withheld the bank guarantees on account of disputes between the parties with respect to some other projects.
As the parties failed to resolve the disputes, SPML filed a writ petition before the Delhi High Court for the release of the bank guarantees. By way of an interim order dated July 8, 2019, the High Court directed NTPC not to encash the bank guarantees. The High Court also directed SPML to keep the bank guarantees alive till final adjudication of the disputes.
During the pendency of the writ proceedings, the parties entered into a settlement agreement under which NTPC agreed to return SPML the bank guarantees and SPML agreed to withdraw its writ petition. SPML also agreed not to initiate arbitration against NTPC under the present contract. Following this, NTPC released the bank guarantees and SPML withdrew the writ petition.
Subsequently, SPML resiled from the settlement agreement and filed a petition under section 11(6) of the Arbitration Act before the High Court for appointment of an arbitrator. The case of SPML was that by way of retaining the bank guarantees with itself, NTPC coerced SPML “to accept the terms of the Settlement Agreement”. By an order dated April 8, 2021, the High Court appointed an arbitral tribunal. Aggrieved, NTPC approached the Supreme Court.
Proceedings before the Supreme Court
At the outset, the Supreme Court noted that since its judgments in SBP & Co. v. Patel Engg. Ltd. and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., among others, had broadened the scope of enquiry under section 11 of the Arbitration Act, the Parliament amended the Arbitration Act in 2015, thereby introducing section 11(6-A).
Under section 11(6-A) of the Arbitration Act, the court while exercising referral jurisdiction would be required to limititself “to the examination of the existence of an arbitration agreement”. The Supreme Court cited its judgment in Duro Felguera, S. A. v. Gangavaram Port Limited and observed that following the insertion of section 11(6-A), the referral jurisdiction of a court “is limited to examining whether an arbitration agreement exists between the parties – nothing more, nothing less”.
In Vidya Drolia v. Durga Trading Corporation, the Supreme Court authoritatively ruled that court undertakes a “prima facie review” at the referral stage. The prima facie review “is not full review but a primary first review to weed out manifestly and ex – facie non – existent and invalid arbitration agreement and non – arbitrable disputes” so as “to cut the deadwood”.
In light of the above, the Supreme Court in the instant case explained that the courts at the referral stage must undertake “two enquiries”: primary and secondary. Primary enquiry pertains to “the existence and validity of an arbitration agreement, which also includes an enquiry as to the parties to the agreement and the applicant’s privity to the said agreement” and the aforesaid enquiry requires “a thorough examination by the referral court”.
The secondary inquiry is with respect to the non-arbitrability of the dispute. The Supreme Court observed that with respect to the defence of non-arbitrability, the arbitral tribunal “is the preferred first authority to determine and decide all questions of non – arbitrability”. The scope of enquiry while examining the issue of non-arbitrability is “prima facie”. Only in exceptional cases would the court reject reference where the claims are “manifestly and ex – facie non – arbitrable”.
The Supreme Court noted that at the referral stage “courts must not undertake a full review of the contested facts: they must be only confined to a primary first review” and let the “facts speak for themselves”. However, the courts are required “to examine whether the assertion on arbitrability is bona fide or not”. At this stage, the courts will refer the disputes for arbitration even where “there is the slightest doubt”. On the other hand, courts will refuse to refer the parties for arbitration only where “there is not even a vestige of doubt that the claim is non – arbitrable”.
This limited scrutiny is through the “eye of the needle”, which in the opinion of the Supreme Court is “necessary and compelling” as the referral court “is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator”.
Coming back to the facts of the present case, the Supreme Court observed that the High Court in the instant case erred in referring the disputes for arbitration, observing “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 Supreme Court noted that the heart of the dispute revolved around the action of NTPC in not returning the bank guarantees even after SPML issued a no-demand certificate. At the time of withdrawal of writ petition, SPML did not raise any allegation of coercion or economic duress. Rather, SPML was only aggrieved by the act of NTPC interlinking the bank guarantees in question with another contract between the parties.
The Supreme Court noted that the SPML’s allegations of coercion and economic duress were “an afterthought”. It was during the pendency of the writ proceedings that the parties entered into a comprehensive settlement agreement. This settlement agreement recorded that there were no subsisting disputes between the parties. The execution of the settlement agreement and the consequent release of the bank guarantees was never disputed by SPML.
Thus, the Supreme Court concluded that in view of the settlement agreement between the parties, the claim of SPML in the section 11 proceedings was “ex facie frivolous and untenable”. Thus, this was a case in which the facts speak for themselves and, in such cases, the High Court ought to have declined reference of disputes to arbitration.
Analysis
The author respectfully submits that in the given facts and circumstances of the case, the Supreme Court was right in allowing the NTPC’s appeal. As soon as a consensual comprehensive settlement agreement was executed between the parties, the disputes between the parties became non – existent and the referral court ought to have declined reference. In Vidya Drolia, the Supreme Court had held “the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non – existent, invalid or the disputes or non – arbitrable”.
However, the observations of the Supreme Court in the instant case regarding a thorough examination “of the existence and the validity of the arbitration agreement” to be carried out by the referral court are contrary to the law laid down by the Supreme Court previously. According to the judgments in Vidya Drolia and N. N. Global Mercantile Private Limited v. Indo Unique Flame Ltd., the court exercises prima facie jurisdiction at the referral stage. It is a summary jurisdiction and the intent of the legislature is to minimise judicial interference at the referral stage. Apart from section 11(6-A), this limited jurisdiction is to be understood in light of section 5 of the Arbitration Act, which provides for minimal judicial interference.
Interestingly, by way of the 2019 Amendment to the Arbitration Act, section 11(6-A) has been deleted. However, its deletion has yet not been notified by the Parliament. In any case, the Supreme Court has noted in Vidya Drolia that even following its deletion, section 11(6-A) of the Arbitration Act and the reason behind its inclusion continues to guide a court’s jurisdiction at the referral stage.
Mandating a thorough examination at the referral stage would defeat the very objective behind the enactment of the Arbitration Act. In fact, the Supreme Court in Shree Vishnu Constructions v. The Engineer in Chief, Military Engineering Service, while holding that courts must endeavour in deciding section 11 petitions within a period of six months, observed that delays in appointment of an arbitral tribunal would defeat the purpose behind the enactment of the Arbitration Act. Thus, the scope of court’s enquiry at the referral stage must be extremely limited and confined to the prima facie existence of the arbitration agreement.
Recent Developments
In May 2023, the Supreme Court in Magic Eye Developers Pvt. Ltd. v. Green Edge Infrastructure Pvt. Ltd referred to the instant judgment and observed that at the referral stage, the court has to decide the issue of existence and validity of an arbitration agreement “conclusively and finally and should not leave the said issue to be determined by the arbitral tribunal” as the same goes to the root of the matter. As the High Court in Magic Eye had referred the matter for arbitration without conclusively deciding the issue of existence and validity of the arbitration agreement, the Supreme Court remanded the matter back to the High Court.
While both the instant judgment and Magic Eye are two judge bench decisions, and are in conflict with the law as explained by the Supreme Court in a five judge Bench decision in N. N. Global Mercantile and a three judge Bench decision in Vidya Drolia, the Supreme Court nonetheless must again clarify the limited jurisdiction which a court is expected to exercise at the referral stage.
– Raghav Bhatia
