Ntpc Ltd. vs M/S Spml Infra Ltd.

NTPC LTD. ....APPELLANT

VERSUS

M/S SPML INFRA LTD. ...RESPONDENT

JUDGMENT

PAMIDIGHANTAM SRI NARASIMHA, J.

1. The present appeal arises out of a decision of the High Court

of Delhi1, allowing the Respondent’s application under Section

11(6) of the Arbitration and Conciliation Act, 19962 for the

constitution of an Arbitral Tribunal. It is the case of Appellant

NTPC that there were no subsisting disputes between the parties

in view of the Settlement Agreement dated 27.05.2020 and that

the application for arbitration is an 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. Signature Not Verified Digitally signed by Sanjay Kumar Date: 2023.04.10 13:30:12 IST Reason: 1 In ARBP No. 477/2020, dated 08.04.2021. 2 hereinafter ‘the Act’.

Page 1 of 27 Short facts giving rise to the filing of the petition under Section 11

of the Act and leading to the impugned decision of the High Court

are as follows.

3. Facts: The Appellant and Respondent, hereinafter referred

to as NTPC and SPML respectively, 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 terms of the contract agreement, SPML

furnished Performance Bank Guarantees and Advanced Bank

Guarantees3 for Rs. 14,96,89,136/- to secure the Appellant.

4. Pursuant to the successful completion of the project, a

Completion Certificate was issued by NTPC on 27.03.2019. By its

letter dated 10.04.2019, NTPC informed SPML that the final

payment under the contract would be released upon the receipt of

a No-Demand Certificate from SPML. The No-Demand Certificate

was issued by SPML on 12.04.2019 and NTPC also released the

final payment amounting to Rs. 1,40,00,000/- in April 2019. The

Bank Guarantees were however withheld.

3 hereinafter referred to as ‘Bank Guarantees’.

Page 2 of 27

5. On 14.05.2019, NTPC informed SPML that the Bank

Guarantees were withheld on account of pending liabilities and

disputes between 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, despite issuance of the Completion Certificate

and the No-Demand Certificate, by linking them to some other

projects, was unjustified. Following the protest, SPML raised a

demand of Rs. 72,01,53,899/- from NTPC as liabilities recoverable

for actions attributable to NTPC under this very contract.

6. By its letter dated 12.06.2019, SPML called upon NTPC to

appoint an Adjudicator for resolving pending disputes in terms of

the General and Special Conditions of Contract. As no action was

taken by NTPC, SPML moved the Delhi High Court by filing Writ

Petition No. 7213 of 2019 under Article 226 of the Constitution, for

the release of the Bank Guarantees. The prayer in the Writ Petition

is to:

“(a) Pass an appropriate Writ, Order or Direction quashing the e-mail dated 14.05.2019 issued by the Respondent insofar 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 the aforesaid Bank Guarantees forthwith, and

Page 3 of 27

(b) Pass any other order or such other orders as may be necessary in the interests of justice, equity and good conscience.”

7. While issuing notice, the High Court, by its interim order

dated 08.07.2019, directed NTPC not to encash the Bank

Guarantees, and further directed SPML to keep the Bank

Guarantees alive.

8. Pending the Writ Petition, negotiations between the parties

culminated in a Settlement Agreement on 27.05.2020. Through

the Settlement Agreement, NTPC agreed to release the withheld

Bank Guarantees. SPML also agreed to withdraw its pending Writ

Petition and undertook not to initiate any other proceedings,

including arbitration, under the subject contract.

9. Following the Settlement Agreement, the Bank Guarantees

were 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 its

implementation, SPML repudiated the Settlement Agreement and

filed the present application under Section 11(6) of the Act in the

Page 4 of 27 Delhi High Court on 10.10.20204. In this Arbitration Petition,

SPML alleged coercion and economic duress in the execution of the

Settlement Agreement. The allegation was, that the retention of the

Bank Guarantees compelled SPML to accept the terms of

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.

11. In its reply to the Arbitration Petition, NTPC raised two-fold

objections. Firstly, that SPML failed to follow the mandatory pre-

arbitration procedure of first referring the disputes to an

Adjudicator as per the terms of the Dispute Resolution Clause5.

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’s decision, or if the Adjudicator fails to give a decision within twenty eight (28) days of 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 a copy for information to the Adjudicator of its intention to commence arbitration, as hereinafter provided, as to the matter in dispute, and no arbitration in respect of this matter may be commenced unless such notice is given.”

5 Dispute resolution was provided under clause 6.1 of the General Conditions of Contract and

clause 3 of Special Conditions of Contract; hereinafter ‘the Dispute Resolution 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 and the Contractor in connection with or arising out of the Contract, including without prejudice to the generality of the foregoing, any question regarding its existence, validity or termination, or the execution of the Facilities- whether during the progress of 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 such dispute or difference by mutual consultation. If the parties fail to resolve such a dispute or difference by mutual consultation, then the dispute shall be referred in writing by either party to the Adjudicator, with a copy to the other party.”

Page 5 of 27 Secondly, that the disputes between the parties were settled by

virtue of the Settlement Agreement dated 27.05.2020. Acting

under the Settlement Agreement, NTPC released the Bank

Guarantees and SPML also proceeded to withdraw the Writ

Petition, and therefore, there was discharge of the contract by

accord and satisfaction. The allegations of coercion and economic

duress were denied as false, as all events occurred during the

subsistence of proceedings before the Delhi High Court, and the

parties willingly complied with the terms of the Settlement

Agreement. Further, the demand of Rs. 72,01,53,899/- was an

afterthought, 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.

12. High Court: The High Court examined the correspondence

between the parties in detail. It rejected the first contention of

NTPC that SPML should have first resorted to an alternative

dispute resolution mechanism under the Dispute Resolution

Clause. It noted that such a request was, in fact, made by SPML

on an earlier occasion, but NTPC failed to respond to the same. On

the request for arbitration and the allegation of economic duress

Page 6 of 27 that allegedly prevailed in signing the Settlement Agreement, the

High Court observed that:

“66. SPML had invoked the arbitration clause and had sought reference of disputes to arbitration. It had also approached this Court. Thus, it would be difficult for SPML to establish that it was economically coerced to enter into the Settlement Agreement. However, this Court is unable to accept that the dispute whether the Contract Agreement stood discharged/novated in terms of the Settlement Agreement, is ex facie untenable, insubstantial or frivolous.” (emphasis supplied)

13. After referring to the decisions of this Court in Mayavati

Trading (P) Ltd. v. Pradyuat Deb Burman6, Vidya Drolia and Ors. v.

Durga Trading Corporation7, Duro Felguera, S.A. v. Gangavaram

Port Ltd.8, Sanjiv Prakash v. Seema Kukreja and Ors.9, and Oriental

Insurance Co. Ltd. and Anr. v. Dicitex Furnishing Ltd.10, the High

Court allowed the Arbitration Petition. It appointed a former Judge

of the Delhi High Court as the Arbitrator on behalf of NTPC, and

directed the respective arbitrators to appoint the presiding

Arbitrator.

14. Submissions by the Parties: Shri Adarsh Tripathi, Advocate

appearing with and on behalf of the Solicitor General, for NTPC,

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.

Page 7 of 27 submitted that the Settlement Agreement dated 27.05.2020 was

arrived at during the pendency of the Writ Petition before the High

Court. The allegations of coercion and economic duress were,

therefore, false and unbelievable. He also submitted that SPML

never raised claims during the subsistence of the contract, before

the Completion Certificate was issued, or even before the final

payment was made. Further, the conduct of SPML, in waiting for

the release of the Bank Guarantees as per the Settlement

Agreement before withdrawing the Writ Petition, and thereafter

instituting the Arbitration Petition, clearly demonstrated that the

allegation of coercion was not bona fide. Finally, he submitted that

the High Court was under an obligation to undertake a limited

scrutiny to examine whether a matter is prima facie arbitrable. For

this purpose, he relied on a recent decision of this Court in Emaar

India Ltd. v. Tarun Aggarwal Projects LLP & Anr11.

15. Shri Jaideep Gupta, Advocate appearing for the Respondent,

SPML, has submitted that the legal principles governing an

application under Section 11(6) of the Act are well-settled following

the decisions of this Court in Mayavati Trading (supra) and Vidya

Drolia (supra). At the pre-referral stage, the jurisdiction of the court

11 2022 SCC OnLine SC 1328.

Page 8 of 27 is restricted to the examination of whether an arbitration

agreement exists between the parties. He submitted that the

decision of the High Court was unexceptionable, since the question

as to whether the Settlement Agreement was executed under

undue influence or coercion could be determined by an Arbitral

Tribunal.

16. Position of Law: 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.

17. The position of law with respect to the pre-referral

jurisdiction, as it existed before the advent of Section 11(6A) in the

Act, was based on a well-articulated principle formulated by this

Court in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd13. In

Boghara Polyfab, this Court held that the issue of non-arbitrability

12 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 agreement expected of them under that procedure; or

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

13 (2009) 1 SCC 267.

Page 9 of 27 of a dispute will have to be examined by the court in cases where

accord and discharge of the contract is alleged. Following the

principle in Boghara Polyfab, this Court in Union of India & Ors. v.

Master Construction Co.14 observed 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 credibility of

the allegations before referring the parties to arbitration. Yet again

in New India Assurance Co. Ltd. v. Genus Power Infrastructure

Ltd.15, this Court observed that allegations of fraud, coercion,

duress or undue influence must be prima facie substantiated

through evidence by the party raising the allegations.

14 (2011) 12 SCC 349:

“18. In our opinion, there is no rule of the absolute kind. In a case where the claimant contends that a discharge voucher or no-claim certificate has been obtained by fraud, coercion, duress or undue influence and the other side contests the correctness thereof, the Chief Justice/his designate must look into this aspect to find 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 discharge voucher or no-claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all.”

15 (2015) 2 SCC 424:

“10. In our considered view, the plea raised by the respondent is bereft of any details and particulars, and cannot be anything but a bald assertion. Given the fact that there was no protest or demur raised around the time or soon after the letter of subrogation was signed, that the notice dated 31-3-2011 itself was nearly after three weeks and that the financial condition of the respondent was not so precarious that it was left with no alternative but to accept the terms as suggested, we are of the firm view that the discharge in the present case and signing of letter of subrogation were not because of exercise of any undue influence. Such discharge and signing of letter 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, there was full and final settlement of the claim. Since our answer to the question, whether there was really accord and satisfaction, is in the affirmative, in our view no arbitrable dispute existed so as to exercise power under Section 11 of the Act. The High Court was not therefore justified in exercising power under Section 11 of the Act.”

Page 10 of 27

18. In a legislative response to these precedents, through the

Arbitration 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 High Court, 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.” (emphasis supplied)

19. Taking cognizance of the legislative change, this Court in

Duro Felguera (supra), noted that post the 2015 Amendments, the

jurisdiction of the court under Section 11(6) of the Act is limited to

examining whether an arbitration agreement exists between the

parties – “nothing more, nothing less”17.

20. However, in the year 2019, in United India Insurance Co. Ltd.

v. Antique Art Exports Pvt. Ltd.18, this Court had nevertheless

16 Arbitration and Conciliation (Amendment) Act 2015 (Act 3 of 2016); hereinafter referred to

as ‘the 2015 Amendments’.

17 Duro Felguera supra note 7, para 59 (concurring opinion of Kurian Joseph, J). 18 (2019) 5 SCC 362:

“21. In the instant case, prima facie no dispute subsisted after the discharge voucher being signed by the respondent without any demur or protest and claim being finally settled with accord and satisfaction and after 11 weeks of the settlement of claim a letter was sent on 27-7-2016 for the first time raising a voice in the form of protest that the discharge voucher was signed under undue influence and coercion with no supportive prima facie evidence being placed on record in absence thereof, it must follow that the claim had been settled with accord and satisfaction leaving no arbitral dispute subsisting under the agreement to be referred to the arbitrator for adjudication.

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

Page 11 of 27 accepted an objection of ‘accord and satisfaction’ in opposition to

an application for reference to arbitration.

21. It did not take much time for this Court to reverse the

approach in Antique Art Exports (supra). A three-judge bench in

Mayavati Trading (supra) expressly overruled the above-referred

decision in Antique Art Exports, observing that:

“10. This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgment, as Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment in Duro Felguera, 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

overarching principle with respect to the pre-referral jurisdiction

under Section 11(6) of the Act was laid down. The relevant portion

of the judgment is as follows:

“153. Accordingly, we hold that the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes

Page 12 of 27 including the question of jurisdiction and non- arbitrability.

154. Discussion under the heading “Who Decides Arbitrability?” 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 of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable.

154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. 154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-

arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

154.4. Rarely as a demurrer the 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, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”

(emphasis supplied)

Page 13 of 27

23. The limited scope of judicial scrutiny at the pre-referral stage

is navigated through the test of a ‘prima facie review’. This is

explained as under:

“133. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence-competence and Section 34 of the Arbitration Act, the referral court without getting bogged down would compel the parties to abide unless there are good and substantial reasons to the contrary.

134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-

arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial… … 138…On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the Arbitral Tribunal to decide.

139. We would not like to be too prescriptive, albeit observe that the court may for legitimate reasons, to prevent wastage of public and private resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the Arbitral Tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the

Page 14 of 27 integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable.

140. Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a ruse to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the Arbitral Tribunal and violate the legislative scheme allocating jurisdiction between the courts and the Arbitral Tribunal. Centralisation of litigation with the Arbitral Tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes.” (emphasis supplied)

24. Following the general rule and the principle laid down in Vidya

Drolia (supra), this Court has consistently been holding that the

arbitral tribunal is the preferred first authority to determine and

decide all questions of non-arbitrability. In Pravin Electricals Pvt.

Ltd. v. Galaxy Infra and Engg. Pvt. Ltd.19, Sanjiv Prakash v. Seema

Kukreja and Ors.20, and Indian Oil Corporation Ltd. v. NCC Ltd.,21

19 (2021) 5 SCC 671, paras 29, 30.

20 (2021) 9 SCC 732.

21 (2022) SCC OnLine SC 896.

Page 15 of 27 the parties were referred to arbitration, as the prima facie review

in each of these cases on the objection of non-arbitrability was

found to be inconclusive. Following the exception to the general

principle that the court may not refer parties to arbitration when

it is clear that the case is manifestly and ex facie non-arbitrable,

in BSNL and Anr. v. Nortel Networks India (P) Ltd.22 and

Secunderabad Cantonment Board v. B. Ramachandraiah & Sons23,

arbitration was refused as the claims of the parties were

demonstrably time-barred.

25. Eye of the Needle: The above-referred precedents crystallise

the position of law that the pre-referral jurisdiction of the courts

under 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.

22 (2021) 5 SCC 738. (hereinafter ‘Nortel Networks’) 23 (2021) 5 SCC 705.

Page 16 of 27

26. As a general rule and a principle, the arbitral tribunal is the

preferred first authority to determine and decide all questions of

non-arbitrability. As an exception to the rule, and rarely as a

demurrer, the referral court may reject claims which are manifestly

and ex-facie non-arbitrable24. Explaining this position, flowing from

the principles laid down in Vidya Drolia (supra), this Court in a

subsequent decision in Nortel Networks (supra) held25:

“45.1 ...While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time-barred and dead, or there is no subsisting dispute...”

27. 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 review26 and let facts speak for themselves. This also

requires the courts to examine whether the assertion on

arbitrability is bona fide or not.27 The prima facie scrutiny of the

facts must lead to a clear conclusion that there is not even a vestige

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.

Page 17 of 27 of doubt that the claim is non-arbitrable.28 On the other hand, even

if there is the slightest doubt, the rule is to refer the dispute to

arbitration29.

28. The limited scrutiny, through the eye of the needle, is

necessary and compelling. It is intertwined with the duty of the

referral court to protect the parties from being forced to arbitrate

when the matter is demonstrably non-arbitrable30. It has been

termed as a legitimate interference by courts to refuse reference in

order to prevent wastage of public and private resources31. Further,

as noted in Vidya Drolia (supra), 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 Court32. 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

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.

Page 18 of 27 arbitrator33, as explained in DLF Home Developers Limited v.

Rajapura Homes Pvt. Ltd.

29. Analysis: We will now proceed to apply these principles to

the present case and examine the arbitrability of the dispute by

undertaking a prima facie review of the basic facts.

30. SPML duly completed the stipulated work under the subject

contract, and a Completion Certificate was issued by NTPC on

27.03.2019. 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 on record about any pending claims of SPML

during the subsistence of the contract or till the release of the final

payment. This is evident from the Writ Petition as well as the

Arbitration Petition under Section 11 of the Act.

32. While NTPC released the final payment, on 14.05.2019, it

justified the withholding of SPML’s Bank Guarantees on the

33 DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd 2021 SCC OnLine SC 781, paras

18, 20.

Page 19 of 27 ground that there are certain disputes between the parties with

respect to other projects.

33. Objecting to the stand of NTPC by its letter dated

15.05.2019, SPML stated that linking the Bank Guarantees with

claims under other projects was unjustified. In turn, SPML raised

a claim of Rs. 72,01,53,899/- against NTPC. At the same time,

SPML also sought the appointment of an “Adjudicator” to settle

these claims.

34. It is in the above-referred context that SPML filed the Writ

Petition before the High Court on 03.07.2019. The prayer in the

Writ Petition, particularly in the context of the huge claim raised

on 15.05.2019, assumes importance. The prayer is reproduced

herein below for ready reference:

“(a) Pass an appropriate Writ, Order or Direction quashing the e-mail dated 14.05.2019 issued by the Respondent insofar 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 the aforesaid Bank Guarantees forthwith, ...”

35. There is no reference to the claim of Rs.72,01,53,899/- in

the body or the Prayer of the Writ Petition. Conspicuously, the Writ

Petition is confined to seeking a direction to return the Bank

Guarantees.

Page 20 of 27

36. Pending disposal of the Writ Petition, the High Court, by an

interim order dated 08.07.2019, directed NPTC not to invoke the

Bank Guarantees. The interim order was subject to SPML keeping

the Bank Guarantees alive. The relevant portions of the order are:

“…

2. Issue notice. The learned counsel appearing for the respondent accepts notice.

3. Admittedly, the contract pursuant to which the bank guarantees in question had been furnished has been completed and there is no dispute that the petitioner’s performance of the contract was satisfactory. The petitioner also claims that it has received the entire consideration for the same. The petitioner’s claims that the release of the bank guarantees is being withheld contrary to the terms of the contract between the parties, in order to pressurize the petitioner in respect of certain disputes in relation to other contracts, which are pending adjudication before the Arbitral Tribunal.

…

6. In the meanwhile, the respondents are restrained from invoking the bank guarantees, subject to the petitioner keeping the same alive.”

37. On 23.07.2019, SPML sent a Notice to NTPC, intimating its

intention to invoke Arbitration under the Dispute Resolution

Clause.

38. During the pendency of the Writ Petition, the parties engaged

themselves in multiple discussions about their claims and

counter-claims. All that culminated in the Settlement Agreement

dated 27.05.2020. The Terms of the Settlement Agreement are as

follows:

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“NOW THEREFORE, in consideration of the premises and mutual 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 the present agreement immediately upon receipt of original Bank Guarantees stated herein below lying with NTPC as mentioned herein below at Para 4.

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

3. That the Agency has confirmed it has received entire payments arising out of the present contract and the same stands closed, and no further sum/money is payable to the Agency in any manner whatsoever by NTPC Ltd. under the subject contract.

…

5. That NTPC Ltd. has further agreed not to raise any contempt proceedings against the Agency for not keeping alive the BGs as directed by the Hon’ble High Court of Delhi in pending Writ Petition.”

39. In compliance with the Settlement Agreement, NTPC

released the Bank Guarantees on 30.06.2020, which were the

subject matter of the pending Writ Petition.

40. It is noteworthy that the Bank Guarantees expired on

19.11.2019 and 16.12.2019, despite the specific direction by the

High Court to SPML to keep its Bank Guarantees alive. However,

in compliance with its express undertaking in the Settlement

Page 22 of 27 Agreement, NTPC did not file any contempt proceedings against

SPML.

41. Following the release of the Bank Guarantees as per the

Settlement Agreement, SPML withdrew the Writ Petition, as

recorded by the High Court in its Order dated 21.09.2020.

42. One month later, on 10.10.2020, SPML filed the Arbitration

Petition under Section 11(6) of the Act alleging coercion and

economic duress in the execution of the Settlement Agreement. It

was also alleged that the Settlement Agreement was repudiated on

22.07.2020 through SPML’s letter to NTPC, disputing the

Settlement Agreement.

43. In its reply to the Arbitration Petition, NTPC specifically

pointed out that SPML never raised any claims with respect to the

dues amounting to Rs. 72,01,53,899/- during the pendency of the

contract, and that the allegations of coercion and economic duress

are completely false. NTPC alleged that the Arbitration Petition

lacked bona fide.

44. A simple narration of the bare facts, as indicated above,

leads us to conclude that the allegations of coercion and economic

duress are not bona fide, and that there were no pending claims

Page 23 of 27 between the parties for submission to arbitration. The

Respondent’s claim fits in the description of an attempt to initiate

“ex facie meritless, frivolous and dishonest litigation”34. We will

endeavor to give reasons for our conclusion.

45. The whole dispute revolves around the solitary act of the

Appellant, NTPC, in not returning the Bank Guarantees despite

the successful completion of work. This continued even after SPML

issued the No-Demand Certificate and NTPC released the final

payment. These undisputed facts led to the institution of the Writ

Petition before the Delhi High Court. There were no allegations of

coercion or economic duress compelling SPML to withdraw any

pending claims under the subject 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 with some other

contracts. This was precisely the argument before the High Court,

and, in fact, this submission is recorded by the High Court while

issuing notice and injuncting NTPC. This fact clearly indicates that

34 Vidya Drolia supra note 7, para 147.11.

Page 24 of 27 the plea of coercion and economic duress leading to the Settlement

Agreement is an afterthought.

46. We will now examine whether the allegations of coercion and

economic duress in the execution of the Settlement Agreement are

bona fide or not. This inquiry has a direct bearing on the

arbitrability of the dispute. It was during the subsistence of the

Writ Petition and the High Court’s interim order, when SPML had

complete protection of the Court, that the parties entered into the

Settlement Agreement. This agreement was comprehensive. It inter

alia provided for (i) the release of Bank Guarantees by NTPC, (ii)

the withdrawal of SPML’s Writ Petition, (iii) restraining NTPC from

filing contempt proceedings against SPML for letting the Bank

Guarantees expire, and finally, (iv) restraining SPML from

initiating any proceedings under the subject contract, including

arbitration. The Settlement Agreement also recorded that there

were no subsisting issues pending between the parties.

47. The plea of coercion and economic duress must be seen in

the context of the execution of the Settlement Agreement not being

disputed, and its implementation leading to the release of the Bank

Guarantees on 30.06.2020 also not being disputed. Almost three

weeks after the release of the Bank Guarantees, a letter of

Page 25 of 27 repudiation was issued by SPML on 22.07.2020. This letter was

issued about two months after the Settlement Agreement was

executed and in fact during the subsistence of the Writ Petition.

After reaping the benefits of the Settlement Agreement, the Writ

Petition was withdrawn on 21.09.2020. It is thereafter that the

present application under Section 11(6) of the Act was filed. The

sequence of events leads us to conclude that the letter of

repudiation was issued only to wriggle out of the terms of the

Settlement Agreement.

48. The foregoing clarifies beyond doubt that the claims sought

to be submitted to arbitration were raised as an afterthought.

Further, SPML’s allegations of coercion and economic duress in

the execution of the Settlement Agreement lack bona fide. They are

liable to be knocked down as ex facie frivolous and untenable.

49. In view of the above-referred facts, which speak for

themselves, 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.

Page 26 of 27

50. 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 (supra).

51. For the reasons stated above, the decision of the High Court

of Delhi in Arbitration Petition No. 477 of 2020, dated 08.04.2021,

is set aside, and Civil Appeal No. 4778 of 2022 stands allowed.

52. The parties shall bear their own costs.

....................................CJI. [Dr Dhananjaya Y Chandrachud]

........................................J. [Pamidighantam Sri Narasimha]

New Delhi;

April 10, 2023

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