A Case Study
Forum: The Hon’ble Supreme Court of India
Bench: Hon’ble Dr Dhananjaya Yeshwant Chandrachud, C.J.I. and Hon’ble Pamidighantam Sri Narasimha, J.
Case Detail: Civil Appeal No. 4778 of 2022
Procedural History: The appeal in question arose from the impugned final judgment and order passed by the Hon’ble High Court of Delhi at New Delhi, dated April 8th, 2021 in ARBP No. 477/2020
Decision of the Court: Appeal allowed
Background
NTPC Ltd. (‘Appellant’) and SPML Infra Ltd. (‘Respondent’) entered into a contract for installation services for a station piping package at Simhadri Super Thermal Power Project Stage II based at NTPC Simhadri, Visakhapatnam.
The Respondent furnished performance bank guarantees and advanced bank guarantees for INR 14,96,89,136/- (Fourteen crores ninety-six lakhs eighty-nine thousand one hundred and thirty-six) to secure the Appellant. Upon the successful completion of the project, NTPC issued a completion certificate. NTPC also informed SPML via a letter dated 10.04.2019, that the final payment will be released upon SPML issuing a no-demand certificate.
The same was issued on April 12th, 2019, after which NTPC released the final payment of INR 1,40,00,000/- (One crore forty lakhs) in April 2019. The bank guarantees, however, were withheld owing to the pending liabilities and disputes between the parties regarding other projects at Bongaigon, Barh, and Korba. NTPC informed SPML of this decision on May 14th, 2019, against which SPML protested, demanding a sum of INR 72,01,53,899/- (Seventy-two crores one lakh fifty-three thousand eight hundred and ninety-nine) from NTPC as liabilities recoverable for actions attributable to NTPC.
To resolve the pending disputes between the parties pertaining to the general and special conditions of the contract, SPML wrote to NTPC on June 12th, 2019, imploring them to appoint an Adjudicator in line with the dispute resolution mechanism enshrined in the contract. However, NTPC did not take any action. Thereafter, SPML moved to the Hon’ble Delhi High Court for the release of the bank guarantees by filing a writ petition under Article 226 of the Constitution. The High Court, by an Interim Order dated July 08th, 2019, directed NTPC to not invoke the bank guarantees, and SPML to keep the bank guarantees alive.
While the writ petition was pending, the parties settled the disputes and entered into a settlement agreement to that effect. NTPC released the bank guarantees on June 30th, 2020 pursuant to the agreement, after which SPML withdrew the writ petition.
Three weeks after the release of the bank guarantees, and two months after the settlement agreement was executed, a letter of repudiation was issued by SPML. SPML alleged coercion and economic duress in the course of the settlement agreement’s execution. Thereafter, SPML repudiated the settlement agreement and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the Hon’ble Delhi High Court on October 10th, 2020.
In the application, SPML also contended that NTPC did not appoint an arbitrator despite repeated requests, due to which SPML had to approach the High Court.
Three grounds on which the NTPC objected to the application filed by SPML
SPML did not comply with the dispute resolution clause, as it did not first refer the dispute to an Adjudicator.
The settlement agreement dated May 27th, 2020 implied that the disputes between the parties were resolved.
The allegations of coercion and economic duress were false, and the settlement agreement was entered into with free will by the parties. This was then willingly complied— with SPML proceeding to withdraw the writ petition, and NTPC releasing the bank guarantees. This, according to NTPC, constituted the discharge of the contract.
NTPC also contended that INR 72,01,53,899/- (Seventy-two crores one lakh fifty-three thousand eight hundred ninety-nine) was demanded as an afterthought, as it was never demanded during the subsistence of the contract. It raised all these contentions to object to the Section 11(6) Application.
Delhi High Court’s Ruling on Section 11 (6) Application: Key Takeaways
The Hon’ble Delhi High Court, while allowing the petition, noted the following points:
SPML made a request to initiate alternative dispute resolution under the dispute resolution clause, to which NTPC did not respond. Therefore, SPML fulfilled the requirements under the dispute resolution clause and the contention that they did not adhere to the said clause was therefore rejected.
The contention of economic duress and coercion would be difficult to stand by, considering the contents and the outcome of the settlement agreement and the decision of SPML to pursue the arbitration application.
The Arbitration Petition was thereafter allowed.
The High Court appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC. It also directed the arbitrators (the Arbitrator appointed by the High Court, and the Arbitrator appointed by SPML) to jointly appoint the Presiding Arbitrator of the Tribunal, as per the terms of the Arbitration Clause.
Jurisdiction of Courts in making referrals under Section 11- Key focus in the present case
The Hon’ble Supreme Court’s Decision
The primary issue to be examined in the present case was the power and jurisdiction of the Courts in making referrals u/s 11 of the Arbitration and Conciliation Act, 1996.
In the present case, the Supreme Court sought to establish a careful balance between inadvertently allowing obstructions to arbitration, and at the same time stepping in to protect the parties from having to arbitrate disputes that should not be or cannot be arbitrated upon. In doing so, the Court reiterated that the pre-referral jurisdiction of courts u/s 11(6) of the Arbitration and Conciliation Act, 1996 though narrow requires a prima facie consideration of arbitrability of the disputes.
While evaluating the requirements that need to be fulfilled for successful referrals to arbitration, the Court posited that two inquiries need to be made— First, a valid arbitration agreement should exist between the parties. This also includes an examination of the parties and the privity.
Second, the matter should not be non-arbitrable.
In this Judgment, the Court views referrals as interference and ponders on questions such as Whether or not the interference is required, what is the scope of the examination, and whether should it be exercised depending on the facts and circumstances of each case.
This power of referral as per the Court, must be exercised conditionally, so as to preserve public and private resources.
The Court stressed the primacy of the arbitral tribunals to determine the issue of arbitrability unless the matter is referred to the courts first, and it is clear that the case is manifestly and ex facie non-arbitrable. The examination required must not be a full review, and must only be confined to a prima facie overview of the case. If there is a question of arbitrability that is raised, the same must be examined to determine whether it is bona fide or not. If there is even a slight doubt during these inquiries, the dispute must be referred to arbitration.
Authored by Mr Shreyas Mehrotra, Partner- Dispute Resolution and Ms Darshana Paltanwale, Associate- Dispute Resolution
Disclaimer
The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.
For further queries or details, you may contact:
Mr Anuroop Omkar,
Partner, AK & Partner