Arbitration Act: Limited Scrutiny Of Court At Pre-Reference Stage U/s. 11 Through 'Eye Of The Needle' Is Necessary- SC

The Supreme Court has held that the Courts while exercising jurisdiction under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Act) is not expected to act mechanically and the limited scrutiny of the courts at the pre-reference stage, through the ‘eye of the needle’ is necessary and compelling.

The Bench of CJI DY Chandrachud and Justice PS Narasimha observed that “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-arbitrable. It has been termed as a legitimate interference by courts to refuse reference in order to prevent wastage of public and private resources. 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 Court. Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator.”

Advocate Adarsh Tripathi appeared on behalf of Solicitor General for appellant and Advocate Jaideep Gupta appeared for the respondent.

In this case, the appeal was preferred against the order of the Delhi High Court whereby the Court had allowed the claimant’s application under Section 11(6) of the Act, after the parties had entered a Settlement agreement.

The appellant- NTPC and respondent- SPML, entered into a contract for “Installation Services for Station Piping Package for Simhadri Super Thermal Power Project Stage II at NTPC at Simhadri, Vishakapatnam”. Certain disputes arose between them, and the respondent filed a writ petition before the High Court seeking release of the Bank Guarantees withheld by NTPC.

During the pendency of the writ petition, negotiations between the parties led to a Settlement Agreement, in terms of which Bank Guarantees were released by NTPC. SPML also withdrew the writ petition, undertaking not to initiate any other proceedings, including arbitration under the contract.

Thereafter, SPML filed an application under Section 11 of the Act before the High Court and sought to refer the dispute to arbitration. The High Court allowed the application, and the parties were referred to arbitration. Aggrieved by the said order, the appellant approached the Apex Court.

The issue dealt with was whether the High Court was under obligation to undertake a limited scrutiny to examine whether the matter was prima facie arbitrable.

The Apex Court noted that in Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1 case, an overarching principle with respect to the pre-referral jurisdiction under Section 11(6) of the Act was laid down. And said that, following the decision in Vidya Drolia case, it has been consistently held by the Courts that the arbitral tribunal was the preferred first authority to determine and decide all questions of non-arbitrability.

The Court further said that the standard of scrutiny to examine the non-arbitrability of a claim was only prima facie. “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-arbitrable.”

The Court further held that “Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves. This also requires the courts to examine whether the assertion on arbitrability is bona fide or not. The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige a of doubt that the claim is non-arbitrable.”

Therefore, the Apex Court observed that the High Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation. These were the kinds of cases where the High Court should have exercised the restricted and limited review to check and protect parties from being forced to arbitrate.

“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.” said the Court.

Accordingly, the appeal was allowed.

Cause Title- NTPC Ltd. v. M/s. SPML Infra Ltd.

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