A Case Study
Part II of II
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
Evolving legal landscape: Court’s analysis of referrals and its evolution in India
The Court also analysed the position of the law with respect to referrals, and how it has evolved over the years. It highlighted the fact that the scope of application of Section 11(6) was limited. It also analysed the position of law taken in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.[1] (‘Boghara Polyfab’), and Union of India and Ors. v. Master Construction Co.[2], (‘Master Construction’), prior to the 2015 and 2019 Amendments to the Arbitration and Conciliation Act, 1996.
The analysis was made while contextualising the position taken by the Court before the insertion of Section 11(6A) by way of the 2015 Amendment.
In Boghara Polyfab, the Supreme Court held that the issue of non-arbitrability has to be examined by courts in cases where accord and discharge of contract are alleged.
In Master Construction, the Court held that when the validity of a discharge voucher, no-claim certificate, or a settlement agreement is in dispute, the court must prima facie examine the allegations before making a referral to arbitration.
After the 2015 Amendment inserted Section 11(6A), the scope of the Courts’ scrutiny while making referrals was solely restricted to determining whether an arbitration agreement existed. However, after various judicial decisions offering conflicting views, the Vidya Drolia and Others v. Durga Trading Corporation and Others[3] (‘Vidya Drolia’) decision, as well as the 2019 Amendment repealing Section 11(6A), offered a clearer and more cohesive jurisprudence in this regard. The ‘Critical Analysis & Impact’ segment below will analyse the same.
While analysing the issue of fraud, coercion, duress or undue influence, the Court cited New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.[4] and held that the party making the allegations in such cases has the onus to prima facie substantiate and prove these allegations through evidence. Applying this rationale to the present case, the Court held that the allegations of economic duress and coercion were not bona fide. The Court noted that the claim of Rs. 72,01,53,899/- was not a part of the Writ Petition, which only prayed for the return of the Bank Guarantees.
The Court noted that all the submissions were pertaining to the withholding of Bank Guarantees, and its linkage with other contracts and disputes between the parties. The contention of economic duress and coercion was only cited when discussing the execution of the Settlement Agreement.
The Supreme Court noted that the Settlement Agreement was fairly comprehensive and achieved what the parties had set out to do, i.e., (i) release of Bank Guarantees by NTPC; (ii) withdrawal of SPML’s Writ Petition; (iii) restraining of NTPC from filing contempt proceedings against SPML for letting the Bank Guarantees expire; and (iv) restraining of SPML from initiating any proceedings under the contract, including arbitration. The Court also noted that the Settlement Agreement conclusively recorded that there were no pending issues between the parties.
No objections were raised during the execution of this Agreement, or during the release of the Bank Guarantees. It was after the issue of the repudiation letter by SMPL, and during the Section 11(6) application that the contentions on coercion and economic duress were raised. Analysing the contentions and events, the Supreme Court concluded that the repudiation letter was only intended to subvert the terms of the Settlement Agreement and that the pleas of economic coercion and duress were untenable, frivolous, and levelled as an afterthought.
The Supreme Court concluded that the High Court ought to have distinguished this case as an “ex-facie meritless and dishonest litigation”, and struck it down. Here, the Supreme Court noted that the High Court should have exercised its scope of inquiry, even in its limited and restricted purview, to prevent an unwarranted arbitration from being initiated. The Supreme Court referenced Vidya Drolia and held that the High Court ought to have heard the issue of the final settlement of the dispute with the principles of Vidya Drolia in mind. Therefore, the Court set aside the decision of the Delhi High Court.
Critical Analysis & Impact
In this case, the Hon’ble Supreme Court highlighted that Section 11(6) of the Arbitration and Conciliation Act, 1996 does not impose on courts the obligation to make referrals mechanically in response to applications. Rather, it empowers courts to exercise discretion to establish a careful balance between making referrals only where necessary and abstaining from forcing the parties to arbitrate a dispute in cases where the dispute is not arbitrable.
In Vidya Drolia, the Court had highlighted that referral proceedings are “preliminary and summary”, and therefore, did not warrant an examination of facts and the merits of the case. The case took note of the principles of severability and kompetenz-kompetenz, concluding that the preferred authority to determine the question of arbitrability is the arbitral tribunal itself. Therefore, the scope of interference by the courts u/s 11, was deliberately limited. Even the scope of the court’s scrutiny was limited. This case held that interference u/s 11 was warranted only in cases where it is “manifestly and ex facie certain that the arbitration agreement is non-existent, invalid, or the disputes are non-arbitrable”. However, the Court also noted that the degree of scrutiny would depend on the nature and facet of non-arbitrability.
In many ways, the language and rationale of Vidya Drolia suggested a restraint in interference by the judiciary in the realm of arbitration. In fact, the judgment expressly discourages courts from usurping the jurisdiction of Arbitral Tribunals by conducting “mini-trials”. This was warranted, owing to the inherent objective of arbitration needing to be distinct and independent of the judiciary, and being a bona fide alternative dispute resolution mechanism.
NTPC v. SPML delineates a layer to this jurisprudence of abstention to interfere— the duty to exercise a prima facie test to screen cases. The objective of this test is simple; to ensure that the parties are not being forced to arbitrate a non-arbitrable dispute and that no frivolous, baseless litigation manifests into an arbitration proceeding if it is inherently non-arbitrable. The Supreme Court reiterated that this test was only limited to restricted scrutiny to determine prima facie arbitrability. But this still means that there exists a ‘checkpoint’ in Section 11(6) applications, that connotes a degree of inquiry, though limited, into whether or not arbitration proceedings would be merited.
Therefore, parties resorting to making Section 11(6) applications to agitate settled matters or to agitate non-arbitrable disputes must therefore take cognizance of this judgment. Parties must also be careful to enter into pre-arbitration settlement agreements and should carefully evaluate what their implications would be on future disputes arising from the same legal relationship.
This decision acts as a harbinger of additional responsibility for the courts empowered to make referrals u/s 11(6).
The courts must fulfil the prima facie examination obligation while steering clear of any substantive scrutiny. They also have to ensure that the party-oriented nature of arbitration (which is one of the biggest strengths of this dispute-resolution mechanism) does not suffer due to judicial interference. At the same time, they also have to carry out their duty of identifying and discouraging frivolous litigation proceedings from crossing over to the side of arbitration, in cases where the same isn’t merited.
Therefore, while the application and referral process enshrined within Section 11(6) may appear to be simplistic, there are several factors that the parties and the judiciary have to take into account to do the provision justice, and to successfully implement the legislative intent of the Arbitration and Conciliation Act, 1996.
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.
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Mr Anuroop Omkar,
Partner, AK & Partner