NTPC Ltd. V. SPML Infra Ltd. (2023) (SC) 287

 ABSTRACT

In the landmark case of NTPC Ltd. v. SPML Infra Ltd. (2023), the Supreme Court of India rendered a pivotal decision concerning the arbitration process under the Arbitration and Conciliation Act, of 1996. The case revolved around a dispute regarding the appointment of an arbitrator, with NTPC arguing that the existence of a settlement agreement rendered the arbitration application by SPML Infra Ltd. invalid.

The Court’s ruling emphasized the crucial role of arbitration in resolving commercial disputes swiftly and effectively. It delineated the narrow scope of the court’s pre-referral jurisdiction, focusing on the examination of the validity of the arbitration agreement and the arbitrability of the dispute. The Court stressed the importance of a prima facie standard in assessing non-arbitrability, aiming to prevent parties from being compelled into arbitration when disputes are unsuitable for such resolution.

This judgment underscores the significance of arbitration as a mechanism for dispute resolution in the modern legal landscape. It highlights the judiciary’s duty to ensure the integrity of the arbitration process while facilitating fair and efficient resolution of commercial conflicts. In doing so, the decision reinforces confidence in arbitration as a vital tool for fostering equitable outcomes in business transactions and contractual relationships.

Keywords:  Arbitration, settlement, dispute, resolution, conflicts, equitable.

INTRODUCTION:

In this case, the Supreme Court was considering a challenge to the choice of Delhi Tall Court of designating a mediator by permitting SPML’s application beneath Area 11(6) of the Assertion and Conciliation Act, 1996 (“Act”). NTPC’s case was that there were no subsisting debates between the parties in see of the settlement agreement executed between them which the application for arrangement of mediator was an idea in retrospect and an abuse of the method.

Permitting the request of NTPC, the Incomparable Court held that the pre-referral ward of the court beneath Segment 11(6) of the Act is exceptionally limited and inheres two asks i.e. presence of substantial assertion understanding and arbitrable debate.

The standard of examination to look at the non-arbitrability of a claim is as it were prima facie not requiring a full audit of challenged truths. Prima facie investigation of realities must lead to a clear conclusion that there’s not even a remnant of question that claim is non-arbitrable. On the off chance that there’s the smallest of the questions debate is to have alluded to intervention. The restricted investigation through the eye of the needle is essential and compelling. It is inter-twin with the obligation of referral court to ensure the party from being constrained to parley when the matter is evidently non-arbitrable. Holding the disputes of SPML to be ex-facie and untenable, the Preeminent Court held that this was a fit case where the Tall Court ought to have worked out the prima facie test to screen and strike down the ex-facie meritless and unscrupulous case.

BACKGROUND:

In the context of a contract between NTPC Ltd. and SPML Infra Ltd. for the “Installation Services for Station Piping Package for Simhadri Super Thermal Power Project Stage II at NTPC at Simhadri, Vishakapatnam,” certain issues arose. SPML, in compliance with the contract, provided bank guarantees to NTPC. Upon the project’s successful completion, NTPC issued a completion certificate and informed SPML that the final payment would be released upon receipt of a No-Demand Certificate, promptly provided by SPML. However, NTPC withheld the bank guarantees due to unresolved disputes relating to other projects. With the disputes lingering, SPML filed a writ petition before the Delhi High Court seeking the release of the bank guarantees. In an interim order on July 8, 2019, the High Court directed NTPC not to encash the bank guarantees and instructed SPML to maintain the guarantees until a final resolution of the disputes.

During the ongoing writ proceedings, the parties reached a settlement agreement. Under this agreement, NTPC committed to returning the bank guarantees, and in return, SPML agreed to withdraw its writ petition and refrain from initiating arbitration under the current contract. Consequently, NTPC released the bank guarantees, and SPML withdrew the writ petition. SPML later reneged on the settlement agreement and filed a petition under section 11(6) of the Arbitration Act before the High Court, seeking the appointment of an arbitrator. SPML’s argument was that NTPC, by retaining the bank guarantees, coerced SPML into accepting the terms of the settlement. On April 8, 2021, the High Court issued an order appointing an arbitral tribunal. NTPC, dissatisfied with this decision, appealed to the Supreme Court.

ISSUES RAISED:

The primary question before the court is whether the Arbitral Tribunal or the court, under Section 11 of the Arbitration and Conciliation Act, should examine the dispute concerning the novation of the contract. The central contention is related to the Settlement Agreement, which, as argued by NTPC, resulted in the novation of the original Contract Agreement. According to NTPC, this novation eliminated the Arbitration Clause from the Contract Agreement, rendering the parties ineligible for arbitration as the Settlement Agreement lacks such a clause. NTPC asserts that the Arbitration Agreement, initially found in the Contract Agreement’s Arbitration Clause, no longer holds validity.

• THE 2015 AMENDMENT TO THE ARBITRATION ACT:

Was a response to recommendations made in the 256th Law Commission Report. One significant addition was Section 11(6A), introduced to narrow the role of courts in the pre-referral stage strictly to determining the existence of the arbitration agreement, adhering to the principle of “nothing more, nothing less.” Despite this, some courts continued to apply the pre-2015 amendment “accord and satisfaction” approach in certain cases.

The Supreme Court, in the case of Vidya Drolia v. Durga Trading Corporation, clarified the scope of pre-referral jurisdiction under Section 11(6A). The Court limited this jurisdiction to a prima facie examination of two key aspects: (i) the existence and validity of the arbitration agreement, and (ii) the arbitrability of the subject matter in dispute. Introducing an “eye of the needle” approach, the Court outlined a two-fold inquiry:

(a) The primary inquiry thoroughly examines the existence and validity of the arbitration agreement. (b) The secondary inquiry, related to arbitrability, involves a prima facie review of facts, including an assessment of the genuineness of assertions regarding arbitrability.

In a specific case involving SPML, the Court, through a prima facie examination, deemed SPML’s claims as an “afterthought.” The allegations of economic duress and coercion were found to lack genuineness. Consequently, the Court dismissed the application, characterizing SPML’s claims as “patently frivolous and untenable” and “obviously devoid of merit and made in bad faith.” Emphasizing a duty for supervisory courts, the Court highlighted that they should not act mechanically but rather ensure that parties are not compelled to arbitrate disputes that are “demonstrably non-arbitrable.” Neglecting this duty would undermine the effectiveness of the arbitration process.

LEGAL ARGUMENTS BY THE PARTIES:

Representing NTPC, Shri Adarsh Tripathi, Advocate along with the Solicitor General, contended that the Settlement Agreement, dated 27.05.2020, was reached during the pendency of the Writ Petition before the High Court. He dismissed allegations of coercion and economic duress, emphasizing that SPML never raised claims during the contract’s subsistence, before the issuance of the Completion Certificate, or prior to the final payment. Tripathi further highlighted SPML’s conduct, waiting for the release of Bank Guarantees per the Settlement Agreement before withdrawing the Writ Petition and subsequently initiating the Arbitration Petition. He argued that the High Court had a duty to conduct limited scrutiny to assess prima facie arbitrability, citing the precedent in Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr11.

On the other side, Shri Jaideep Gupta, Advocate for SPML, argued that the legal principles governing Section 11(6) applications are well-established, referring to decisions in Mayavati Trading (supra) and Vidya Drolia (supra). He maintained that, at the pre-referral stage, the court’s jurisdiction is confined to determining the existence of an arbitration agreement between the parties. Gupta contended that the High Court’s decision was justified since the question of whether the Settlement Agreement was executed under undue influence or coercion should be adjudicated by the Arbitral Tribunal.

JUDGEMENT:

The Court emphasized that the cited precedents clarify the limited scope of pre-referral jurisdiction under Section 11(6) of the Act, highlighting two specific inquiries. The primary inquiry focuses on the existence and validity of the arbitration agreement, including an examination of the parties involved and the applicant’s connection to the agreement. This requires a thorough examination by the court referring to the matter. The secondary inquiry, which may arise during the reference stage, pertains to the non-arbitrability of the dispute. The Court observed that nearly three weeks after the release of the Bank Guarantees, the respondent issued a letter of repudiation, approximately two months after the execution of the Settlement Agreement and during the ongoing writ petition. The writ petition was subsequently withdrawn after benefiting from the settlement agreement, and it was only afterward that the current application under Section 11(6) of the Act was filed. Considering the sequence of events, the Court concluded that the letter of repudiation was issued with the intention of evading the terms of the Settlement Agreement. Consequently, the claims submitted for arbitration were deemed an afterthought. Additionally, the respondent’s allegations of coercion and economic duress in executing the Settlement Agreement were considered lacking in bona fide. The Court deemed these claims as patently frivolous and untenable.

In its verdict, the Supreme Court conducted a thorough examination of the legal framework governing pre-referral jurisdiction, considering both the period before and after the 2015 Amendment. The Court delineated pre-referral stage cases into three distinct categories:

(a) Cases necessitating direct determination by the Court, specifically concerning aspects such as assessing the existence and validity of the arbitration agreement;

(b) Cases falling exclusively under the jurisdiction of the arbitral tribunal;

(c) Cases where the court has the option to decide, particularly those involving the determination of whether the parties concluded the contract or transaction by mutually satisfying their rights and obligations or by making the final payment. This approach is commonly known as the “accord and satisfaction approach.”