Court not expected to act mechanically while exercising jurisdiction under Section 11(6) of Arbitration Act: Supreme Court

The Supreme Court recently ruled that while exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act 1996, the court is not expected to act mechanically merely to deliver a purported dispute raised at the doors of a chosen arbitrator [NTPC Limited v. M/S SPML Infrastructure Limited]..A Division Bench of Chief Justice of India DY Chandrachud and Justice PS Narasimha was of the view that the limited scrutiny by such courts, through the 'eye of the needle', is necessary."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 Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator," the judgment said..Section 11(6) confers jurisdiction upon the Supreme Court or a High Court in case of non-compliance of the procedure for 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 constitution of an arbitral tribunal, after the concerned parties have entered into a settlement agreement..By way of background, the appellant entered into a contract with the respondent for installation services. In terms of the contract agreement, the respondent furnished bank guarantees of ₹14,96,89,136.On March 27, 2019, a completion certificate was issued by the appellant after the project was completed. The appellant had informed the respondent that the final payment under the contract would be released upon the receipt of a no-demand certificate from respondent. After the no-demand certificate was issued by the respondent, the appellant released the final payment amounting to ₹1,40,00,000 in April 2019. However, the bank guarantees were withheld on account of pending liabilities and disputes between the parties.The respondent raised a demand of ₹72,01,53,899 from the appellant as liabilities recoverable for actions attributable to appellant under this very contract. With no response from the appellant, the respondent preferred a petition before the High Court seeking release of bank guarantees from the appellant. The High Court directed the appellant not to encash the bank guarantees, and further directed the respondent to keep them alive.Meanwhile, a settlement agreement was reached by the parties, with the appellant agreeing to release the bank guarantees and the respondent agreeing to withdraw the plea from the High Court. However, the respondent repudiated the settlement agreement and filed an application before the High Court under Section 11(6) of the Act. In the application, the appellant alleged that the dispute between the parties was settled under the settlement agreement, and thus, there was discharge of the contract by accord and satisfaction.The High Court allowed the said application in favour of the respondent. Aggrieved by the same, the appellant moved the apex court..In its analysis, the top court noted that the entire law concerning pre-referral jurisdiction of the court under Section 11(6) is covered by the decision in Vidya Drolia and Ors. v. Durga Trading Corporation. In that case, it was held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the 1996 Act is identical, but extremely limited and restricted.In Vidya Drolia, it was further held that a 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 are non-arbitrable.The Bench noted that following this decision, it has been consistently holding that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability..As an exception to the rule laid down in Vidya Drolia, and rarely as a demurrer, the referral court may also reject claims which are manifestly and ex-facie non-arbitrable, the Court clarified. To this end, it placed reliance on its decision in BSNL and Another v. Nortel Networks India (P) Limited."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," the Court held..Applying the above principles to the instant case, the Court noted that the respondent's allegations of coercion and economic duress are not bona fide since there were no pending claims between the parties for submission to arbitration.Moreover, the Court was of the view that the letter of repudiation on the part of the respondent was issued only to wriggle out of the terms of the settlement agreement.It thus held that the High Court has committed an error in allowing the application under Section 11(6) of the Act..Solicitor General Tushar Mehta and Advocate Adarsh Tripathi appeared for the appellant.Advocate Jaideep Gupta represented the respondent..[Read Judgment]