Supreme Court: Do not expect courts to act mechanically while exercising jurisdiction under A&C Act

Supreme Court: Do not expect courts to act mechanically while exercising jurisdiction under A&C Act

Holds that it is the duty of the referral court to protect the parties from being forced to arbitrate when the matter is clearly non-arbitrable

The Supreme Court has ruled that while exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation (A&C) Act, 1996, the Court is not expected to act mechanically merely to deliver a purported dispute raised at the doors of a chosen arbitrator.

In the NTPC Limited vs SPML Infrastructure Limited case, a Division Bench of Chief Justice DY Chandrachud and Justice PS Narasimha held that the limited scrutiny by such courts, through the 'eye of the needle', was necessary.

The Judges stated, "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 A&C Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen Arbitrator.”

Section 11(6) confers jurisdiction upon the Top Court or a High Court in case of non-compliance with the procedure for the appointment of an Arbitrator.

The Court was hearing an appeal against a decision of the Delhi High Court which had allowed the respondent's application under Section 11(6) for constituting an arbitral tribunal after the concerned parties entered into a settlement agreement.

Earlier, the appellant had entered into a contract with the respondent for installation services. As per the agreement, the respondent furnished bank guarantees of Rs.14,96,89,136.

In March 2019, a completion certificate was issued by the appellant after the project was completed. The appellant informed the respondent that the final payment would be released after the receipt of a no-demand certificate from the respondent. Once that was issued, in April 2019, the appellant released the final payment of Rs.1,40,00,000. However, the bank guarantees were withheld on account of pending liabilities and disputes between the parties.

The respondent raised a demand of Rs.72,01,53,899 from the appellant as liabilities recoverable for the actions.

Not getting any response from the appellant, the respondent petitioned before the High Court seeking the release of bank guarantees from the appellant.

The Court ordered the appellant not to encash the bank guarantees and directed the respondent to keep them alive.

Meanwhile, a settlement was reached by the parties, with the appellant agreeing to release the bank guarantees and the respondent agreeing to withdraw the court plea.

However, the respondent repudiated the settlement agreement and filed an application before the Court under the A&C Act. On the other hand, the appellant alleged that the dispute between the parties was settled, thus, there was a discharge of the contract by accord and satisfaction.

Thereafter, the Court allowed the application in favor of the respondent. Aggrieved by the order, the appellant moved the apex court.

The Top Court noted that the entire law concerning the pre-referral jurisdiction of the court under Section 11(6) was covered by the decision in the Vidya Drolia and Ors. vs Durga Trading Corporation case. Therein, it was held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the A&C Act was identical, but extremely limited and restricted.

The bench had further held that a Court may interfere at Section 8 or 11 stages when it was “manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable.”

Thus, the present bench noted that following the decision, it was consistently held that the arbitral tribunal was the preferred first authority to determine and decide all questions of non-arbitrability.

However, the Court clarified that as an exception to the rule laid down in the Vidya Drolia case, and rarely as a demurrer, the referral court may also reject claims which are manifestly and ex-facie non-arbitrable. It further placed reliance on its decision in the BSNL and Another vs Nortel Networks India (P) Limited case.

The judgment had held, "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.”

Thus, applying the above principles, Chief Justice DY Chandrachud and Justice Narasimha stated that the respondent's allegations of coercion and economic duress were not bona fide since there were no pending claims between the parties for submission to arbitration.

It added that the letter of repudiation on the part of the respondent was issued only to wriggle out of the terms of the settlement agreement.

The Judges thus held that the high court committed an error in allowing the application under Section 11(6) of the A&C Act.

While Solicitor General Tushar Mehta and advocate Adarsh Tripathi appeared for the appellant, the respondent was represented by advocate Jaideep Gupta.