Case Number: Civil Appeal No. 4778 of 2022
Judges Name: Hon’ble Judges Dr. Dhananjaya Y. Chandrachud J, Pamidighantam Sri Narasimha, J.J
Order dated: 10.04.2023

Facts of the case:

1. The NTPC and SPML entered into a contract for “Installation Services for Station Piping Package for Simhadri Super Thermal Power Project Stage II at NTPC at Simhadri, Vishakapatnam”. In  contract , SPML furnished Performance Bank Guarantees and Advanced Bank Guarantees for Rs. 14,96,89,136/- to secure the Appellant. Pursuant to the successful completion of the project, a Completion Certificate was issued by NTPC. They informed SPML that the final payment would be released upon the receipt of a No-Demand Certificate of SMPL. NTPC released the final payment amounting to Rs. 1,40,00,000/- which the Bank Guarantees were however withheld. 
2. NTPC informed  that the Bank Guarantees were withheld on account of pending liabilities. SPML informed NTPC that the retention of Bank Guarantees, despite issuance of the  Certificates  by linking them to some other projects, was unjustified. Further SPML raised a demand of Rs. 72,01,53,899/- from NTPC as liabilities recoverable for actions attributable to NTPC under this very contract. SPML called upon NTPC to appoint an Adjudicator for resolving pending disputes.  As no action was taken by NTPC, SPML moved the Delhi High Court by filing Writ Petition under Article 226 of the Constitution, for the release of the Bank Guarantees. While issuing notice, the High Court passed the interim order directed not to encash the Bank Guarantees, and further directed SPML to keep the Bank Guarantees alive. 
3. Pending the Writ Petition, negotiations between the parties culminated in a Settlement. Following the Settlement Agreement, the Bank Guarantees were released by NTPC . SPML withdrew the Writ Petition. After the settlement of the disputes, SPML filed the present application under Section 11(6). In  Arbitration Petition, SPML alleged coercion and economic duress in the execution of the Settlement Agreement.  SPML also averred that NTPC had failed to appoint an arbitrator in spite of repeated requests, and therefore the High Court must constitute an Arbitral Tribunal, in exercise of its jurisdiction under the Act. 
4. In reply to the Petition, NTPC raised two-fold objections. First, SPML failed to follow the mandatory pre-arbitration procedure of first referring the disputes to an Adjudicator as per the Dispute Resolution Clause. Second,  that the disputes between the parties were settled by virtue of the Settlement Agreement, there was discharge of the contract by accord and satisfaction. The allegations of coercion and economic duress were denied and the parties willingly complied with the terms of the Settlement Agreement. Further, the demand of Rs. 72,01,53,899/- was never raised during the subsistence of the contract. Under these circumstances, NTPC submitted that the application under Section 11(6) of the Act must be rejected. 
5. The High Court rejected the first contention of NTPC that SPML should have first resorted to an alternative dispute resolution mechanism. It made by SPML on an earlier stage, but NTPC failed to respond to the same. The High Court allowed the Arbitration Petition. It appointed the former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC. The Solicitor submitted the Settlement Agreement of the Writ Petition before the HC and it was under an obligation to undertake a limited scrutiny to examine whether a matter is prima facie arbitrable by HC. Shri Jaideep Gupta, Advocate, has submitted that the jurisdiction of the court is restricted to the examination of whether an arbitration agreement exists between the parties. 
6. In the present case, we are concerned with the pre-referral jurisdiction of the High Court under Section 11 of the Act and would like to underscore the limited scope within which an application under Section 11(6)12 of the Act has to be considered. Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute.

Hon’ble Supreme Court observed/held as follows:

• Applying the principles to the present case and examine the arbitrability of the dispute by undertaking a prima facie review of the basic facts. We are of the opinion that this is a case where the High Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation. These are the kinds of cases where the High Court should exercise the restricted and limited review to check and protect parties from being forced to arbitrate. 

• Accordingly, we have no hesitation in holding that the High Court has committed an error in allowing the application under Section 11(6) of the Act. High Court ought to have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia and Ors. v. Durga Trading Corporation.  For the reasons stated above, the decision of the High Court of Delhi in Arbitration Petition No. 477 of 2020, was set aside, and Civil Appeal No. 4778 of 2022 stands allowed. The parties shall bear their own costs.