NTPC LTD. versus M/S SPML INFRA LTD on 10 April 2023

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[2023] 2 S.C.R. 846

SUPREME COURT REPORTS

[2023] 2 S.C.R.

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NTPC LTD.

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M/S SPML INFRA LTD.

(Civil Appeal No. 4778 of 2022)

BAPRIL 10, 2023

[DR. DHANANJAYA Y CHANDRACHUD, CJI ANDPAMIDIGHANTAM SRI NARASIMHA, J.]

Arbitration and Conciliation Act 1996 : s. 11(6) – Constitutionof arbitral tribunal – Arbitiability of the dispute – Contract betweenCthe parties – Successful completion of work by SPML and issuanceof completion certificate by NTPC – NTPC released the final payment– However, NTPC withheld SPML’s Bank Guarantees with respectto other projects – In turn, SPML raised a claim against NTPC, andthereafter, filed writ petition seeking release the Bank GuaranteesD– During pendency, the parties arrived at a Settlement Agreementand in compliance thereof, NTPC released the Bank Guaranteesand SPML withdrew the writ petition – After one month, SPML filedthe arbitration petition u/s. 11(6) alleging coercion and economicduress in the execution of the Settlement Agreement – High Courtallowed the same – On appeal held: No allegations of coercion orEeconomic duress compelling SPML to withdraw any pending claimsunder the subject contract as a condition for the return of the BankGuarantees – Only allegation by SPML was with respect to NTPC’sillegal action of interlinking the release of the Bank Guaranteeswith some other contracts –Allegations of coercion and economicFduress not bona fide, and that there were no pending claims betweenthe parties for submission to arbitration – Claim of SPML was anattempt to initiate ex facie meritless, frivolous and dishonest litigation– High Court should have exercised the prima facie test to screenand strike down the ex-facie meritless and dishonest litigation – Itshould have exercised the restricted and limited review to checkGand protect parties from being forced to arbitrate – High Courterred in allowing the application u/s. 11(6), thus, the decision ofthe High Court set aside.

s. 11(6) – Pre-referral jurisdiction of the courts u/s. 11(6) –Scope of – Held: Is very narrow and inheres two inquiries – PrimaryH

inquiry is about the existence and the validity of an arbitrationagreement and the secondary inquiry is with respect to the non-arbitrability of the dispute at the reference stage – Standard ofscrutiny to examine the non-arbitrability of a claim is only primafacie – Limited scrutiny, through the eye of the needle, is necessaryand compelling – If this duty within the limited extent is not exercised,and the Court becomes too reluctant to intervene, it may underminethe effectiveness of both, arbitration and the Court – Thus, thisCourt or a High Court, while exercising jurisdiction u/s. 11(6) notexpected to act mechanically merely to refer a purported disputeraised by an applicant to the chosen arbitrator.

Allowing the appeal, the Court

HELD: 1.1 The pre-referral jurisdiction of the courts underSection 11(6) of the Act is very narrow and inheres two inquiries.The primary inquiry is about the existence and the validity of anarbitration agreement, which also includes an inquiry as to theparties to the agreement and the applicant’s privity to the saidagreement. These are matters which require a thoroughexamination by the referral court. The secondary inquiry that mayarise at the reference stage itself is with respect to the nonarbitrability of the dispute. [Para 25][862-E-F]

1.2 As a general rule and a principle, the arbitral tribunal isthe preferred first authority to determine and decide all questionsof non-arbitrability. As an exception to the rule, and rarely as ademurrer, the referral court may reject claims which aremanifestly and ex-facie non-arbitrable. The standard of scrutinyto examine the non-arbitrability of a claim is only prima facie.Referral courts must not undertake a full review of the contestedfacts; they must only be confined to a primary first review and letfacts speak for themselves. This also requires the courts toexamine whether the assertion on arbitrability is bona fide ornot. The prima facie scrutiny of the facts must lead to a clearconclusion that there is not even a vestige of doubt that the claimis non-arbitrable. On the other hand, even if there is the slightestdoubt, the rule is to refer the dispute to arbitration. [Paras 26,27][862-G; 863-C-E]

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A1.3 The limited scrutiny, through the eye of the needle, isnecessary and compelling. It is intertwined with the duty of thereferral court to protect the parties from being forced to arbitratewhen the matter is demonstrably non-arbitrable. It has beentermed as a legitimate interference by courts to refuse referencein order to prevent wastage of public and private resources.BFurther, as noted in Vidya Drolia’s case, if this duty within thelimited compass is not exercised, and the Court becomes tooreluctant 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 SectionC11(6) of the Act, is not expected to act mechanically merely todeliver a purported dispute raised by an applicant at the doors ofthe chosen arbitrator. [Para 28][863-E-F; 864-A]

2.1 A simple narration of the bare fact leads to concludethat the allegations of coercion and economic duress are not bonaDfide, and that there were no pending claims between the partiesfor submission to arbitration. The respondent’s claim fits in thedescription of an attempt to initiate “ex facie meritless, frivolousand dishonest litigation” [Para 44][867-D]

2.2 The whole dispute revolves around the solitary act ofEthe Appellant, NTPC, in not returning the Bank Guaranteesdespite the successful completion of work. This continued evenafter SPML issued the No-Demand Certificate and NTPCreleased the final payment. These undisputed facts led to theinstitution of the Writ Petition before the Delhi High Court. Therewere no allegations of coercion or economic duress compellingFSPML to withdraw any pending claims under the subject contractas a condition for the return of the Bank Guarantees. On thecontrary, the only allegation by SPML was with respect to NTPC’s“illegal” action of interlinking the release of the Bank Guaranteeswith some other contracts. This was precisely the argument beforeGthe High Court, and, in fact, this submission is recorded by theHigh Court while issuing notice and injuncting NTPC. This factclearly indicates that the plea of coercion and economic duressleading to the Settlement Agreement is an afterthought. [Para45][867-E-G]

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2.3. It was during the subsistence of the Writ Petition andthe High Court’s interim order, when SPML had completeprotection of the Court, that the parties entered into theSettlement Agreement. This agreement was comprehensive. Itinter alia provided for the release of Bank Guarantees by NTPC,the withdrawal of SPML’s Writ Petition, restraining NTPC fromfiling contempt proceedings against SPML for letting the BankGuarantees expire, and finally, restraining SPML from initiatingany proceedings under the subject contract, including arbitration.The Settlement Agreement also recorded that there were nosubsisting issues pending between the parties. [Para 46][868-A-C]

2.4. After reaping the benefits of the Settlement Agreement,the Writ Petition was withdrawn on 21.09.2020. It is thereafterthat the present application under Section 11(6) of the Act wasfiled. The sequence of events leads to conclude that the letter ofrepudiation was issued only to wriggle out of the terms of theSettlement Agreement. Thus, it is clarified that the claims soughtto be submitted to arbitration were raised as an afterthought.Further, SPML’s allegations of coercion and economic duress inthe execution of the Settlement Agreement lack bona fide. Theyare liable to be knocked down as ex facie frivolous and untenable.[Paras 47 and 48][868-E-G]

2.5. This is a case where the High Court should haveexercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation. These are the kinds ofcases where the High Court should exercise the restricted andlimited review to check and protect parties from being forced toarbitrate. Thus, the High Court erred in allowing the applicationunder Section 11(6) of the Act. The High Court ought to haveexamined the issue of the final settlement of disputes in thecontext of the principles laid down in Vidya Drolia’s case. Thus,the decision of the High Court is set aside. [Paras 49-51][868-G-H; 869-A-B]

Vidya Drolia and Ors. v. Durga Trading Corporation(2021) 2 SCC 1 – relied on.

Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman(2019) 8 SCC 714 : [2019] 12 SCR 123; Duro AB

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SUPREME COURT REPORTS

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4778of 2022.

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From the Judgment and Order dated 08.04.2021 of the High Courtof Delhi at New Delhi in ARBP No. 477 of 2020.

Adarsh Tripathi, Vikram S. Baid, Ajitesh Garg, Gaurav, Advs. forthe Appellant.

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Jaideep Gupta, Soumya Dutta, Advs. for the Respondent.

The Judgment of the Court was delivered by PAMIDIGHANTAM SRI NARASIMHA, J.

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1. The present appeal arises out of a decision of the High Courtof Delhi[1], allowing the Respondent’s application under Section 11(6) ofthe Arbitration and Conciliation Act, 1996[2] for the constitution of anArbitral Tribunal. It is the case of Appellant NTPC that there were nosubsisting disputes between the parties in view of the SettlementAgreement dated 27.05.2020 and that the application for arbitration isan afterthought and abuse of the process.

2. By an order dated 15.07.2022, this Court, while granting leave,stayed all further proceedings before the Arbitral Tribunal. Short factsgiving rise to the filing of the petition under Section 11 of the Act andleading to the impugned decision of the High Court are as follows.

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3. Facts: The Appellant and Respondent, hereinafter referred toas NTPC and SPML respectively, entered into a contract for “InstallationServices for Station Piping Package for Simhadri Super ThermalPower Project Stage II at NTPC at Simhadri, Vishakapatnam”. Interms of the contract agreement, SPML furnished Performance BankGuarantees and Advanced Bank Guarantees[3]for Rs. 14,96,89,136/- tosecure the Appellant.

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1 In ARBP No. 477/2020, dated 08.04.2021.

2 hereinafter ‘the Act’.

3 hereinafter referred to as ‘Bank Guarantees’.

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A4. Pursuant to the successful completion of the project, aCompletion Certificate was issued by NTPC on 27.03.2019. By its letterdated 10.04.2019, NTPC informed SPML that the final payment underthe contract would be released upon the receipt of a No-DemandCertificate from SPML. The No-Demand Certificate was issued byBSPML on 12.04.2019 and NTPC also released the final paymentamounting to Rs. 1,40,00,000/-in April 2019. The Bank Guarantees werehowever withheld.

5. On 14.05.2019, NTPC informed SPML that the BankGuarantees were withheld on account of pending liabilities and disputesCbetween the parties with respect to other projects at Bongaigon, Barh,and Korba. SPML naturally protested. By its letter dated 15.05.2019,SPML informed NTPC that the retention of Bank Guarantees, despiteissuance of the Completion Certificate and the No-Demand Certificate,by linking them to some other projects, was unjustified. Following theprotest, SPML raised a demand of Rs. 72,01,53,899/- from NTPC asDliabilities recoverable for actions attributable to NTPC under this verycontract.

6. By its letter dated 12.06.2019, SPML called upon NTPC toappoint an Adjudicator for resolving pending disputes in terms of theGeneral and Special Conditions of Contract. As no action was taken byENTPC, SPML moved the Delhi High Court by filing Writ Petition No.7213 of 2019 under Article 226 of the Constitution, for the release of theBank Guarantees. The prayer in the Writ Petition is to:

“(a) Pass an appropriate Writ, Order or Direction quashingthe e-mail dated 14.05.2019 issued by the Respondent insofarFas it pertains to the release of the Bank Guarantees being (a)0040ILG002609, (b) 0040ILG001109, (C) 0040ILG001209,(d) 0040ILG001309 and direct the Respondent to release theaforesaid Bank Guarantees forthwith, and (b) Pass any other order or such other orders as may beGnecessary in the interests of justice, equity and goodconscience.”

7. While issuing notice, the High Court, by its interim order dated08.07.2019, directed NTPC not to encash the Bank Guarantees, andfurther directed SPML to keep the Bank Guarantees alive.H

8. Pending the Writ Petition, negotiations between the partiesculminated in a Settlement Agreement on 27.05.2020. Through theSettlement Agreement, NTPC agreed to release the withheld BankGuarantees. SPML also agreed to withdraw its pending Writ Petitionand undertook not to initiate any other proceedings, including arbitration,under the subject contract.

9. Following the Settlement Agreement, the Bank Guaranteeswere released by NTPC on 30.06.2020. SPML withdrew the Writ Petition,as recorded in the Order of the Delhi High Court dated 21.09.2020.

10. After the aforesaid settlement of the disputes, followed by itsimplementation, SPML repudiated the Settlement Agreement and filedthe present application under Section 11(6) of the Act in the Delhi HighCourt on 10.10.2020[4]. In this Arbitration Petition, SPML alleged coercionand economic duress in the execution of the Settlement Agreement.The allegation was, that the retention of the Bank Guarantees compelledSPML to accept the terms of Settlement Agreement. SPML also averredthat NTPC had failed to appoint an arbitrator in spite of repeated requests,and therefore the High Court must constitute an Arbitral Tribunal, inexercise of its jurisdiction under the Act.

11. In its reply to the Arbitration Petition, NTPC raised two-foldobjections. Firstly, that SPML failed to follow the mandatory pre-arbitration procedure of first referring the disputes to an Adjudicator asper the terms of the Dispute Resolution Clause[5]. Secondly, that the 4 Clause 6.2 of the General Conditions of Contract is as under:

“6.2 Arbitration

6.2.1 If either the Employer or the Contractor is dissatisfied with the Adjudicator’sdecision, or if the Adjudicator fails to give a decision within twenty eight (28) daysof a dispute being referred to it, then either the Employer or the Contractor may,within fifty six (56) days of such reference, give notice to the other party, with acopy for information to the Adjudicator of its intention to commence arbitration, ashereinafter provided, as to the matter in dispute, and no arbitration in respect ofthis matter may be commenced unless such notice is given.”

5 Dispute resolution was provided under clause 6.1 of the General Conditions ofContract and clause 3 of Special Conditions of Contract; hereinafter ‘the DisputeResolution Clause’; Clause 6.1 of the General Conditions of Contract is as under:

“6. Settlement of Disputes

6.1 Adjudicator

6.1.1 If any dispute of any kind whatsoever shall arise between the Employer andthe Contractor in connection with or arising out of the Contract, including withoutprejudice to the generality of the foregoing, any question regarding its existence, A

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Adisputes between the parties were settled by virtue of the SettlementAgreement dated 27.05.2020. Acting under the Settlement Agreement,NTPC released the Bank Guarantees and SPML also proceeded towithdraw the Writ Petition, and therefore, there was discharge of thecontract by accord and satisfaction. The allegations of coercion andBeconomic duress were denied as false, as all events occurred during thesubsistence of proceedings before the Delhi High Court, and the partieswillingly complied with the terms of the Settlement Agreement. Further,the demand of Rs. 72,01,53,899/- was an afterthought, never raised duringthe subsistence of the contract. Under these circumstances, NTPCsubmitted that the application under Section 11(6) of the Act must beCrejected.

12. High Court: The High Court examined the correspondencebetween the parties in detail. It rejected the first contention of NTPCthat SPML should have first resorted to an alternative dispute resolutionmechanism under the Dispute Resolution Clause. It noted that such aDrequest was, in fact, made by SPML on an earlier occasion, but NTPCfailed to respond to the same. On the request for arbitration and theallegation of economic duress that allegedly prevailed in signing theSettlement Agreement, the High Court observed that:

E“66. SPML had invoked the arbitration clause and had soughtreference of disputes to arbitration. It had also approachedthis Court. Thus, it would be difficult for SPML to establishthat it was economically coerced to enter into the SettlementAgreement.However, this Court is unable to accept that thedispute whether the Contract Agreement stood discharged/Fnovated in terms of the Settlement Agreement, is ex facieuntenable, insubstantial or frivolous.”

Gvalidity or termination, or the execution of the Facilities- whether during the progressof the Facilities or after their completion and whether before or after the termination,abandonment or breach of the Contract- the parties shall seek to resolve any suchdispute or difference by mutual consultation. If the parties fail to resolve such adispute or difference by mutual consultation, then the dispute shall be referred inwriting by either party to the Adjudicator, with a copy to the other party.”H

13. After referring to the decisions of this Court in MayavatiTrading (P) Ltd. v. Pradyuat Deb Burman[6], Vidya Drolia and Ors.v. Durga Trading Corporation[7], Duro Felguera, S.A. v. GangavaramPort Ltd.[8], Sanjiv Prakash v. Seema Kukreja and Ors.[9], and OrientalInsurance Co. Ltd. and Anr. v. Dicitex Furnishing Ltd.[10], the HighCourt allowed the Arbitration Petition. It appointed a former Judge ofthe Delhi High Court as the Arbitrator on behalf of NTPC, and directedthe respective arbitrators to appoint the presiding Arbitrator.

14. Submissions by the Parties: Shri Adarsh Tripathi, Advocateappearing with and on behalf of the Solicitor General, for NTPC, submittedthat the Settlement Agreement dated 27.05.2020 was arrived at duringthe pendency of the Writ Petition before the High Court. The allegationsof coercion and economic duress were, therefore, false and unbelievable.He also submitted that SPML never raised claims during the subsistenceof the contract, before the Completion Certificate was issued, or evenbefore the final payment was made. Further, the conduct of SPML, inwaiting for the release of the Bank Guarantees as per the SettlementAgreement before withdrawing the Writ Petition, and thereafter institutingthe Arbitration Petition, clearly demonstrated that the allegation of coercionwas not bona fide. Finally, he submitted that the High Court was underan obligation to undertake a limited scrutiny to examine whether a matteris prima facie arbitrable. For this purpose, he relied on a recent decisionof this Court in Emaar India Ltd. v. Tarun Aggarwal Projects LLP &Anr[11].

15. Shri Jaideep Gupta, Advocate appearing for the Respondent,SPML, has submitted that the legal principles governing an applicationunder Section 11(6) of the Act are well-settled following the decisions ofthis Court in Mayavati Trading (supra) and Vidya Drolia (supra). Atthe pre-referral stage, the jurisdiction of the court is restricted to theexamination of whether an arbitration agreement exists between theparties. He submitted that the decision of the High Court wasunexceptionable, since the question as to whether the Settlement 6 (2019) 8 SCC 714.

7 (2021) 2 SCC 1. (hereinafter ‘Vidya Drolia’)

8 (2017) 9 SCC 729.

9 (2021) 9 SCC 732.

10 (2020) 4 SCC 621.

11 2022 SCC OnLine SC 1328.

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AAgreement was executed under undue influence or coercion could bedetermined by an Arbitral Tribunal.

16. Position of Law: In the present case, we are concernedwith the pre-referral jurisdiction of the High Court under Section 11of the Act and would like to underscore the limited scope withinBwhich an application under Section 11(6)[12]of the Act has to beconsidered.

17. The position of law with respect to the pre-referraljurisdiction, as it existed before the advent of Section 11(6A) in theAct, was based on a well-articulated principle formulated by thisCCourt in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd[13].In Boghara Polyfab, this Court held that the issue of non-arbitrabilityof a dispute will have to be examined by the court in cases whereaccord and discharge of the contract is alleged. Following the principlein Boghara Polyfab, this Court in Union of India & Ors. v. MasterDConstruction Co.[14]observed that when the validity of a dischargevoucher, no-claim certificate or a settlement agreement is in dispute,the court must prima facie examine the credibility of the allegationsbefore referring the parties to arbitration. Yet again in New India

E12 Arbitration and Conciliation Act 1996 (Act 26 of 1996), Section 11(6):“(6)Where, under an appointment procedure agreed upon by the parties,—(a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreementexpected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted tohim or it under that procedure, a party may request 1 [the Supreme Court or,Fas the case may be, the High Court or any person or institution designated bysuch Court]to take the necessary measure, unless the agreement on theappointment procedure provides other means for securing the appointment.”

13 (2009) 1 SCC 267.

14 (2011) 12 SCC 349:

“18. In our opinion, there is no rule of the absolute kind. In a case where theclaimant contends that a discharge voucher or no-claim certificate has been obtainedGby fraud, coercion, duress or undue influence and the other side contests thecorrectness thereof, the Chief Justice/his designate must look into this aspect tofind out at least, prima facie, whether or not the dispute is bona fide and genuine.Where the dispute raised by the claimant with regard to validity of the dischargevoucher or no-claim certificate or settlement agreement, prima facie, appears to belacking in credibility, there may not be a necessity to refer the dispute for arbitrationHat all.”

Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.[15], this Courtobserved that allegations of fraud, coercion, duress or undue influencemust be prima facie substantiated through evidence by the partyraising the allegations.

18. In a legislative response to these precedents, through theArbitration and Conciliation (Amendment) Act 2015,[16] sub-section (6A)was added to Section 11 of the Act, which reads as follows:

“(6-A) The Supreme Court or, as the case may be, the HighCourt, while considering any application under sub-section(4) or sub-section (5) or sub-section (6), shall,notwithstanding any judgment, decree or order of any court,confine to the examination of the existence of an arbitration”agreement.

19. Taking cognizance of the legislative change, this Court in DuroFelguera (supra), noted that post the 2015 Amendments, the jurisdictionof the court under Section 11(6) of the Act is limited to examining whetheran arbitration agreement exists between the parties – “nothing more,nothing less”[17].

15 (2015) 2 SCC 424:

“10. In our considered view, the plea raised by the respondent is bereft of anydetails and particulars, and cannot be anything but a bald assertion. Given the factthat there was no protest or demur raised around the time or soon after the letter ofsubrogation was signed, that the notice dated 31-3-2011 itself was nearly afterthree weeks and that the financial condition of the respondent was not so precariousthat it was left with no alternative but to accept the terms as suggested, we are ofthe firm view that the discharge in the present case and signing of letter of subrogationwere not because of exercise of any undue influence. Such discharge and signing ofletter of subrogation was voluntary and free from any coercion or undue influence.In the circumstances, we hold that upon execution of the letter of subrogation, therewas full and final settlement of the claim. Since our answer to the question, whetherthere was really accord and satisfaction, is in the affirmative, in our view no arbitrabledispute existed so as to exercise power under Section 11 of the Act. The High Courtwas not therefore justified in exercising power under Section 11 of the Act.”

16 Arbitration and Conciliation (Amendment) Act 2015 (Act 3 of 2016); hereinafterreferred to as ‘the 2015 Amendments’.

17 Duro Felguera supra note 7, para 59 (concurring opinion of Kurian Joseph, J).

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A20. However, in the year 2019, in United India Insurance Co.Ltd. v. Antique Art Exports Pvt. Ltd.[18], this Court had neverthelessaccepted an objection of ‘accord and satisfaction’ in opposition to anapplication for reference to arbitration.

21. It did not take much time for this Court to reverse the approachBin Antique Art Exports (supra). A three-judge bench in MayavatiTrading (supra) expressly overruled the above-referred decision inAntique Art Exports, observing that:

“10. This being the position, it is clear that the law prior tothe 2015 Amendment that has been laid down by this Court,Cwhich would have included going into whether accord andsatisfaction has taken place, has now been legislativelyoverruled. This being the position, it is difficult to agree withthe reasoning contained in the aforesaid judgment, as Section11(6-A) is confined to the examination of the existence of anarbitration agreement and is to be understood in the narrowDsense as has been laid down in the judgment in DuroFelguera, SA.”

22. The entire case law on the subject was considered by a three-judge bench of this Court in Vidya Drolia (supra), and an overarchingprinciple with respect to the pre-referral jurisdiction under Section 11(6)Eof the Act was laid down. The relevant portion of the judgment is asfollows:

“153. Accordingly, we hold that the expression “existence ofan arbitration agreement” in Section 11 of the Arbitration 18 (2019) 5 SCC 362:F“21. In the instant case, prima facie no dispute subsisted after the discharge voucherbeing signed by the respondent without any demur or protest and claim beingfinally settled with accord and satisfaction and after 11 weeks of the settlement ofclaim a letter was sent on 27-7-2016 for the first time raising a voice in the form ofprotest that the discharge voucher was signed under undue influence and coercionwith no supportive prima facie evidence being placed on record in absence thereof,Git must follow that the claim had been settled with accord and satisfaction leavingno arbitral dispute subsisting under the agreement to be referred to the arbitrator foradjudication.

22. In our considered view, the High Court has committed a manifest error inpassing the impugned order and adopting a mechanical process in appointing thearbitrator without any supportive evidence on record to prima facie substantiatethat an arbitral dispute subsisted under the agreement which needed to be referredHto the arbitrator for adjudication.”

Act, would include aspect of validity of an arbitrationagreement, albeit the court at the referral stage would applythe prima facie test on the basis of principles set out in thisjudgment. In cases of debatable and disputable facts, andgood reasonable arguable case, etc., the court would forcethe parties to abide by the arbitration agreement as the ArbitralTribunal has primary jurisdiction and authority to decide thedisputes including the question of jurisdiction and non-arbitrability.

154. Discussion under the heading ”Who DecidesArbitrability?” can be crystallised as under:

154.1. Ratio of the decision in Patel Engg. Ltd. [SBP &Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope ofjudicial review by the court while deciding an applicationunder Sections 8 or 11 of the Arbitration Act, post theamendments by Act 3 of 2016 (with retrospective effect from23-10-2015) and even post the amendments vide Act 33 of2019 (with effect from 9-8-2019), is no longer applicable.

154.2. Scope of judicial review and jurisdiction of the courtunder Sections 8 and 11 of the Arbitration Act is identical butextremely limited and restricted.

154.3. The general rule and principle, in view of the legislativemandate clear from Act 3 of 2016 and Act 33 of 2019, andthe principle of severability and competence-competence, isthat the Arbitral Tribunal is the preferred first authority todetermine and decide all questions of non-arbitrability. Thecourt has been conferred power of “second look” on aspectsof non-arbitrability post the award in terms of sub-clauses(i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section34(2)(b) of the Arbitration Act.

154.4. Rarely as a demurrer the court may interfere at Section8 or 11 stage when it is manifestly and ex facie certain thatthe arbitration agreement is non-existent, invalid or thedisputes are non-arbitrable, though the nature and facet ofnon-arbitrability would, to some extent, determine the leveland nature of judicial scrutiny. The restricted and limited reviewis to check and protect parties from being forced to arbitrate AB

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“”Awhen the matter is demonstrably non-arbitrable and to cutoff the deadwood. The court by default would refer the matterwhen contentions relating to non-arbitrability are plainlyarguable;when consideration in summary proceedings wouldbe insufficient and inconclusive;when facts are contested;when the party opposing arbitration adopts delaying tacticsBor impairs conduct of arbitration proceedings. This is not thestage for the court to enter into a mini trial or elaborate reviewso as to usurp the jurisdiction of the Arbitral Tribunal but toaffirm and uphold integrity and efficacy of arbitration as analternative dispute resolution mechanism.”

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23. The limited scope of judicial scrutiny at the pre-referral stageisnavigated through the test of a ‘prima facie review’. This is explainedas under:

D“133. Prima facie case in the context of Section 8 is not to beconfused with the merits of the case put up by the partieswhich has to be established before the Arbitral Tribunal. It isrestricted to the subject-matter of the suit being prima faciearbitrable under a valid arbitration agreement. Prima faciecase means that the assertions on these aspects are bona fide.EWhen read with the principles of separation and competence-competence and Section 34 of the Arbitration Act, the referralcourt without getting bogged down would compel the partiesto abide unless there are good and substantial reasons to thecontrary.

F134.Prima facie examination is not full review but a primaryfirst reviewto weed out manifestly and ex facie non-existentand invalid arbitration agreements and non-arbitrabledisputes. The prima facie review at the reference stage is tocut the deadwood and trim off the side branches inGstraightforward cases where dismissal is barefaced andpellucid and when on the facts and law the litigation muststop at the first stage.Only when the court is certain that novalid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8would be rejected. At this stage, the court should not get lost H

in thickets and decide debatable questions of facts. Referralproceedings are preliminary and summary and not a minitrial…

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138…On the other hand, issues relating to contract formation,existence, validity and non-arbitrability would be connectedand intertwined with the issues underlying the merits of therespective disputes/claims. They would be factual and disputedand for the Arbitral Tribunal to decide.

139. We would not like to be too prescriptive, albeit observethat the court may for legitimate reasons, to prevent wastageof public and private resources, can exercise judicialdiscretion to conduct an intense yet summary prima faciereview while remaining conscious that it is to assist thearbitration procedure and not usurp jurisdiction of the ArbitralTribunal. Undertaking a detailed full review or a long-drawnreview at the referral stage would obstruct and cause delayundermining the integrity and efficacy of arbitration as adispute resolution mechanism. Conversely, if the court becomestoo reluctant to intervene, it may undermine effectiveness ofboth the arbitration and the court. There are certain caseswhere the prima facie examination may require a deeperconsideration. The court’s challenge is to find the right amountof and the context when it would examine the prima faciecase orexercise restraint. The legal order needs a right balancebetween avoiding arbitration obstructing tactics at referralstage and protecting parties from being forced to arbitratewhen the matter is clearly non-arbitrable.

140. Accordingly, when it appears that prima facie reviewwould be inconclusive, or on consideration inadequate as itrequires detailed examination, the matter should be left forfinal determination by the Arbitral Tribunalselected by theparties by consent. The underlying rationale being not to delayor defer and to discourage parties from using referralproceeding as a ruse to delay and obstruct. In such cases afull review by the courts at this stage would encroach on thejurisdiction of the Arbitral Tribunal and violate the legislative A

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Ascheme allocating jurisdiction between the courts and theArbitral Tribunal. Centralisation of litigation with the ArbitralTribunal as the primary and first adjudicator is beneficent asit helps in quicker and efficient resolution of disputes.”

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24. Following the general rule and the principle laid down inVidya Drolia (supra), this Court has consistently been holding that thearbitral tribunal is the preferred first authority to determine and decideall questions of non-arbitrability. In Pravin Electricals Pvt. Ltd. v. GalaxyInfra and Engg. Pvt. Ltd.[19], Sanjiv Prakash v. Seema Kukreja andCOrs.[20], and Indian Oil Corporation Ltd. v. NCC Ltd.,[21 ]the parties werereferred to arbitration, as the prima facie review in each of these caseson the objection of non-arbitrability was found to be inconclusive.Following the exception to the general principle that the court maynot refer parties to arbitration when it is clear that the case is manifestlyand exfacie non-arbitrable, in BSNL and Anr. v. Nortel Networks IndiaD(P) Ltd.[22]and Secunderabad Cantonment Board v. B. Ramachandraiah& Sons[23], arbitration was refused as the claims of the parties weredemonstrably time-barred.

25. Eye of the Needle: The above-referred precedents crystallisethe position of law that the pre-referral jurisdiction of the courts underESection 11(6) of the Act is very narrow and inheres two inquiries. Theprimary inquiry is about the existence and the validity of an arbitrationagreement, which also includes an inquiry as to the parties to theagreement and the applicant’s privity to the said agreement. Theseare matters which require a thorough examination by the referral court.FThe secondary inquiry that may arise at the reference stage itself is withrespect to the non-arbitrability of the dispute.

26. As a general rule and a principle, the arbitral tribunal is thepreferred first authority to determine and decide all questions of non-arbitrability. As an exception to the rule, and rarely as a demurrer,Gthe referral court may reject claims which are manifestly and ex- 19 (2021) 5 SCC 671, paras 29, 30.

20 (2021) 9 SCC 732.

21 (2022) SCC OnLine SC 896.

22 (2021) 5 SCC 738. (hereinafter ‘Nortel Networks’)

H23 (2021) 5 SCC 705.

facie non-arbitrable[24]. Explaining this position, flowing from theprinciples laid down in Vidya Drolia (supra), this Court in a subsequentdecision in Nortel Networks (supra) held[25]:

“45.1 ...While exercising jurisdiction under Section 11 as thejudicial forum, the court may exercise the prima facie test toscreen and knockdown ex facie meritless, frivolous, anddishonest litigation. Limited jurisdiction of the courts wouldensure expeditious and efficient disposal at the referral stage.At the referral stage, the Court can interfere “only” when itis “manifest” that the claims are ex facie time-barred anddead, or there is no subsisting dispute...”

27. The standard of scrutiny to examine the non-arbitrability of aclaim is only prima facie. Referral courts must not undertake a fullreview of the contested facts; they must only be confined to a primaryfirst review[26] and let facts speak for themselves. This also requires thecourts to examine whether the assertion on arbitrability is bona fide ornot.[27] The prima facie scrutiny of the facts must lead to a clearconclusion that there is not even a vestige of doubt that the claim isnon-arbitrable.[28] On the other hand, even if there is the slightest doubt,the rule is to refer the dispute to arbitration[29].

28. The limited scrutiny, through the eye of the needle, is necessaryand compelling. It is intertwined with the duty of the referral court toprotect the parties from being forced to arbitrate when the matter isdemonstrably non-arbitrable[30].It has been termed as a legitimateinterference by courts to refuse reference in order to prevent wastageof public and private resources[31]. Further, as noted in Vidya Drolia(supra), if this duty within the limited compass is not exercised, and theCourt becomes too reluctant to intervene, it may undermine theeffectiveness of both, arbitration and the Court[32]. Therefore, this 24 Vidya Drolia supra note 7, para 154.4.

25 Nortel Networks supra note 22, para 45.1.

26 Vidya Drolia supra note 7, para 134.

27 ibid.

28 Nortel Networks supra note 22, para 47.

29 Vidya Drolia supra note 7, para 154.4.

30 ibid para 154.4.

31 ibid para 139.

32 ibid.

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ACourt or a High Court, as the case may be, while exercising jurisdictionunder Section 11(6) of the Act, is not expected to act mechanicallymerely to deliver a purported dispute raised by an applicant at thedoors of the chosen arbitrator[33], as explained in DLF HomeDevelopers Limited v. Rajapura Homes Pvt. Ltd.

B29. Analysis: We will now proceed to apply these principles tothe present case and examine the arbitrability of the dispute by undertakinga prima facie review of the basic facts.

30. SPML duly completed the stipulated work under the subjectcontract, and a Completion Certificate was issued by NTPC onC27.03.2019. SPML sought the release of the final payment, and NTPC,by its letter dated 10.04.2019, agreed to release the same.

31. A No-Demand Certificate was issued by SPML on 12.04.2019,and the final payment was released by April 2019. There is nothing onrecord about any pending claims of SPML during the subsistence of theDcontract or till the release of the final payment. This is evident from theWrit Petition as well as the Arbitration Petition under Section 11 of theAct.

32. While NTPC released the final payment, on 14.05.2019, itjustified the withholding of SPML’s Bank Guarantees on the ground thatEthere are certain disputes between the parties with respect to otherprojects.

33. Objecting to the stand of NTPC by its letter dated 15.05.2019,SPML stated that linking the Bank Guarantees with claims under otherprojects was unjustified. In turn, SPML raised a claim of Rs. 72,01,53,899/F- against NTPC. At the same time, SPML also sought the appointmentof an “Adjudicator” to settle these claims.

34. It is in the above-referred context that SPML filed the WritPetition before the High Court on 03.07.2019. The prayer in the WritPetition, particularly in the context of the huge claim raised on 15.05.2019,assumes importance. The prayer is reproduced herein below for readyGreference:

“(a) Pass an appropriate Writ, Order or Direction quashingthe e-mail dated 14.05.2019 issued by the Respondent insofar 33 DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd 2021 SCC OnLine SCH781, paras 18, 20.

as it pertains to the release of the Bank Guarantees being (a)0040ILG002609, (b) 0040ILG001109, (c) 0040ILG001209,(d) 0040ILG001309 and direct the Respondent to release theaforesaid Bank Guarantees forthwith, ...”

35. There is no reference to the claim of Rs.72,01,53,899/- in thebody or the Prayer of the Writ Petition. Conspicuously, the Writ Petitionis confined to seeking a direction to return the Bank Guarantees.

36. Pending disposal of the Writ Petition, the High Court, by aninterim order dated 08.07.2019,directed NPTC not to invoke the BankGuarantees. The interim order was subject to SPML keeping the BankGuarantees alive. The relevant portions of the order are:

“…

2. Issue notice. The learned counsel appearing for therespondent accepts notice.

3. Admittedly, the contract pursuant to which the bankguarantees in question had been furnished has beencompleted and there is no dispute that the petitioner’sperformance of the contract was satisfactory. The petitioneralso claims that it has received the entire consideration forthe same. The petitioner’s claims that the release of the bankguarantees is being withheld contrary to the terms of thecontract between the parties, in order to pressurize thepetitioner in respect of certain disputes in relation to othercontracts, which are pending adjudication before the ArbitralTribunal.

…

6. In the meanwhile, the respondents are restrained frominvoking the bank guarantees, subject to the petitionerkeeping the same alive.”

37. On 23.07.2019, SPML sent a Notice to NTPC, intimating itsintention to invoke Arbitration under the Dispute Resolution Clause.

38. During the pendency of the Writ Petition, the parties engagedthemselves in multiple discussions about their claims and counter-claims.All that culminated in the Settlement Agreement dated 27.05.2020. TheTerms of the Settlement Agreement are as follows:

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“NOW THEREFORE, in consideration of the premises andmutual promises contained herein, the parties agree as follows:

1. That the Agency undertakes to withdraw WP No. 7213/2019 filed in the Hon’ble High Court upon execution of thepresent agreement immediately upon receipt of original BankGuarantees stated herein below lying with NTPC as mentionedherein below at Para 4.

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2. That the Agency has agreed not to initiate any furtherproceedings in relation with the present contract agreementand work executed by the Agency, of any nature whatsoever.Further, the Agency has undertaken not to raise any claim ofany nature whatsoever against the NTPC Ltd. in relation withthe present contract agreement and work executed by theAgency, be it Arbitration proceedings, civil suit, writ petition,or any other proceedings before any judicial or quasi-judicialforum.

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3. That the Agency has confirmed it has received entirepayments arising out of the present contract and the samestands closed, and no further sum/money is payable to theAgency in any manner whatsoever by NTPC Ltd. under theEsubject contract.

…

5. That NTPC Ltd. has further agreed not to raise anycontempt proceedings against the Agency for not keeping aliveFthe BGs as directed by the Hon’ble High Court of Delhi inpending Writ Petition.”

39. In compliance with the Settlement Agreement, NTPC releasedthe Bank Guarantees on 30.06.2020, which were the subject matter ofthe pending Writ Petition.

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40. It is noteworthy that the Bank Guarantees expired on19.11.2019 and 16.12.2019, despite the specific direction by the HighCourt to SPML to keep its Bank Guarantees alive. However, incompliance with its express undertaking in the Settlement Agreement,NTPC did not file any contempt proceedings against SPML.

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41. Following the release of the Bank Guarantees as per theSettlement Agreement, SPML withdrew the Writ Petition, as recordedby the High Court in its Order dated 21.09.2020.

42. One month later, on 10.10.2020, SPML filed the ArbitrationPetition under Section 11(6) of the Act alleging coercion and economicduress in the execution of the Settlement Agreement. It was also allegedthat the Settlement Agreement was repudiated on 22.07.2020 throughSPML’s letter to NTPC, disputing the Settlement Agreement.

43. In its reply to the Arbitration Petition, NTPC specifically pointedout that SPML never raised any claims with respect to the dues amountingto Rs. 72,01,53,899/- during the pendency of the contract, and that theallegations of coercion and economic duress are completely false. NTPCalleged that the Arbitration Petition lacked bona fide.

44. A simple narration of the bare facts, as indicated above, leadsus to conclude that the allegations of coercion and economic duress arenot bona fide, and that there were no pending claims between the partiesfor submission to arbitration. The Respondent’s claim fits in the descriptionof an attempt to initiate “ex facie meritless, frivolous and dishonestlitigation”[34]. We will endeavor to give reasons for our conclusion.

45. The whole dispute revolves around the solitary act of theAppellant, NTPC, in not returning the Bank Guarantees despite thesuccessful completion of work. This continued even after SPML issuedthe No-Demand Certificate and NTPC released the final payment. Theseundisputed facts led to the institution of the Writ Petition before theDelhi High Court. There were no allegations of coercion or economicduress compelling SPML to withdraw any pending claims under thesubject contract as a condition for the return of the Bank Guarantees.On the contrary, the only allegation by SPML was with respect to NTPC’s“illegal” action of interlinking the release of the Bank Guarantees withsome other contracts. This was precisely the argument before the HighCourt, and, in fact, this submission is recorded by the High Court whileissuing notice and injuncting NTPC. This fact clearly indicates that theplea of coercion and economic duress leading to the SettlementAgreement is an afterthought.

34 Vidya Drolia supra note 7, para147.11.

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34 Vidya Drolia supra note 7, para147.11.

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A46. We will now examine whether the allegations of coercion andeconomic duress in the execution of the Settlement Agreement are bonafide or not. This inquiry has a direct bearing on the arbitrability of thedispute. It was during the subsistence of the Writ Petition and the HighCourt’s interim order, when SPML had complete protection of the Court,Bthat the parties entered into the Settlement Agreement. This agreementwas comprehensive. It inter alia provided for (i) the release of BankGuarantees by NTPC, (ii) the withdrawal of SPML’s Writ Petition, (iii)restraining NTPC from filing contempt proceedings against SPML forletting the Bank Guarantees expire, and finally, (iv) restraining SPMLfrom initiating any proceedings under the subject contract, includingCarbitration. The Settlement Agreement also recorded that there were nosubsisting issues pending between the parties.

47. The plea of coercion and economic duress must be seen inthe context of the execution of the Settlement Agreement not beingdisputed, and its implementation leading to the release of the BankDGuarantees on 30.06.2020 also not being disputed. Almost three weeksafter the release of the Bank Guarantees, a letter of repudiation wasissued by SPML on 22.07.2020. This letter was issued about two monthsafter the Settlement Agreement was executed and in fact during thesubsistence of the Writ Petition. After reaping the benefits of theESettlement Agreement, the Writ Petition was withdrawn on 21.09.2020.It is there after that the present application under Section 11(6) of theAct was filed. The sequence of events leads us to conclude that theletter of repudiation was issued only to wriggle out of the terms of theSettlement Agreement.

F48. The foregoing clarifies beyond doubt that the claims soughtto be submitted to arbitration were raised as an afterthought. Further,SPML’s allegations of coercion and economic duress in the execution ofthe Settlement Agreement lack bona fide. They are liable to be knockeddown as exfacie frivolous and untenable.G49. In view of the above-referred facts, which speak for G49. In view of the above-referred facts, which speak forthemselves, we are of the opinion that this is a case where the HighCourt should have exercised the prima facie test to screen and strikedown the ex-facie meritless and dishonest litigation. These are the kindsof cases where the High Court should exercise the restricted and limitedreview to check and protect parties from being forced to arbitrate.H

50. Accordingly, we have no hesitation in holding that the HighCourt has committed an error in allowing the application under Section11(6) of the Act. High Court ought to have examined the issue of thefinal settlement of disputes in the context of the principles laid down inVidya Drolia (supra).

51. For the reasons stated above, the decision of the High Courtof Delhi in Arbitration Petition No.477 of 2020, dated 08.04.2021, is setaside, and Civil Appeal No.4778 of 2022 stands allowed.

52. The parties shall bear their own costs.

Nidhi Jain

Appeal allowed.

(Assisted by : Surbhi Soni and Rakhi, LCRAs)

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