Source: Supreme Court  

Why in News?

In a recent ruling, the Supreme Court observe that courts under Section 11(6) of the Arbitration & Conciliation Act, 1996, must limit their role to determining the prima facie existence of an arbitration agreement, without delving into the factual details of the dispute. The Court criticized the High Court for conducting a detailed factual analysis and dismissing the arbitration application. This decision reinforces the legislative intent behind the 2015 amendment, which restricted judicial scrutiny at the Section 11 stage.  

• Additionally, the Court observes the possibility of imposing costs on parties misusing arbitration. 

What was the Background of Goqii Technologies Private Limited v. Sokrati Technologies Private Limited case? 

• Goqii Technologies Private Limited (appellant), a technology-based wellness company, entered into a Master Services Agreement (MSA) with Sokrati Technologies Private Limited (respondent), a digital marketing company and subsidiary of Dentsu International Limited. 
• Between August 2021 and April 2022, the appellant paid Rs. 5,53,26,690/- to the respondent for services rendered. 
• In September 2022, media reports alleged malpractices in the advertising  
• industry, and the Economic Offences Wing, Mumbai filed a complaint against Dentsu International Limited (respondent's parent company) for alleged irregularities. 
• The appellant hired an independent auditor in November 2022 to review the respondent's activities from April 2021 to December 2022.  
  • The audit report in February 2023 revealed concerns about low ROI and estimated overcharges of Rs. 4,48,53,580. 
• On 22^th February 2023, the respondent served a demand notice under the IBC seeking Rs. 6,25,67,060/- for outstanding invoices. 
• The appellant rejected the demand on 4^th March, 2023, citing the audit findings, and invoked arbitration under Clause 18.12 of the MSA.  
  • They also filed a counter claim seeking refund of Rs. 5,53,26,690/- with 18% interest and Rs. 6 crore in damages. 
• When the respondent failed to comply with the arbitration notice, the appellant filed a Commercial Arbitration Application before the Bombay High Court seeking appointment of an arbitrator. 
• While this application was pending, the respondent filed a petition before the NCLT, Mumbai under Section 9 of the IBC to initiate corporate insolvency resolution process against the appellant. 
• The Bombay High Court dismissed the appellant's application for appointment of an arbitrator, leading to the present appeal before the Supreme Court. 

What were the Court’s Observations? 

• The Supreme Court observed that the scope of inquiry under Section 11 of the Arbitration and Conciliation Act, 1996 is strictly limited to ascertaining the prima facie existence of an arbitration agreement, as per the legislative intent behind the 2015 amendment. 
• The Court held that the High Court had exceeded its jurisdictional limits by conducting a detailed examination of the factual matrix and making an in-depth assessment of the auditor's report at Section 11 stage. 
• Relying on its recent pronouncement in SBI General Insurance Co. Ltd. v. Krish Spinning (2024), the Court reiterated that the Constitution Bench judgment in In Re: Interplay had confined the referral court's scrutiny solely to examining the prima facie existence of the arbitration agreement. 
• The Court explicitly rejected the notion that referral courts should determine the frivolity of disputes at the Section 11 stage, noting that the arbitral tribunal is equally, if not more, competent to adjudicate such matters with the benefit of extensive pleadings and evidentiary material. 
• While cautioning against the misuse of arbitration proceedings, the Court empowered arbitral tribunals to impose costs on parties found to have initiated baseless proceedings or abused the process of law. 
• The Court observed that since the existence of the arbitration agreement in Clause 18.12 of the MSA was undisputed, the question of whether a valid dispute exists could be addressed by the Arbitral Tribunal as a preliminary issue. 
• The Court preserved the respondent's right to raise all legal contentions and objections before the appointed arbitrator, ensuring that the limited scrutiny at the referral stage did not prejudice the parties' substantive rights. 

What is Section 11 of the Arbitration & Conciliation Act,1996? 

• Section 11(1) and (2) establish that any person, regardless of nationality, can be an arbitrator unless parties agree otherwise, and parties are free to agree on the procedure for appointing arbitrators. 
• Under Section 11(3), in a three-arbitrator tribunal, each party appoints one arbitrator, and the two appointed arbitrators select the third arbitrator who acts as the presiding arbitrator. 
• Section 11(4) and (5) provide that if parties fail to appoint arbitrators within 30 days, or if the two appointed arbitrators fail to agree on the third arbitrator, the Supreme Court or High Court (or their designate) can make the appointment upon request. 
• Section 11(6A), a crucial provision added by the 2015 amendment, explicitly limits the court's examination to only determining the existence of an arbitration agreement, notwithstanding any previous judgments. 
• Per Section 11(8), the Court or its designate must seek written disclosure from prospective arbitrators under Section 12(1) and consider both the qualifications required by the parties' agreement and other factors to ensure independence and impartiality. 
• Section 11(12) distinguishes jurisdiction: for international commercial arbitration, only the Supreme Court has authority; for domestic arbitration, the relevant High Court within whose jurisdiction the principal Civil Court is situated has authority. 
• Section 11(13) mandates expeditious disposal of arbitrator appointment applications, setting a target timeline of 60 days from the date of service of notice on the opposite party. 
• Section 11(14) empowers High Courts to frame rules for determining arbitral tribunal fees, considering the rates specified in the Fourth Schedule. 

What is Section 11(6) of the Act ? 

• Section 11(6) provides a remedy when there is a breakdown in the agreed appointment procedure, covering three specific scenarios:  
• When a party fails to follow the agreed procedure 
• When parties or appointed arbitrators fail to reach an expected agreement 
• When a designated person or institution fails to perform their entrusted function 
• Under Section 11(6), parties can approach the Supreme Court or High Court (or their designate) to intervene and take necessary measures, unless the agreement specifically provides alternative means for securing appointments. 
• Section 11(6A) significantly limits the scope of judicial intervention by mandating that courts must confine their examination solely to determining the existence of an arbitration agreement, regardless of any previous judicial precedents. 
• The restriction imposed by Section 11(6A) applies uniformly to all applications made under subsections (4), (5), and (6), establishing a consistent standard of judicial scrutiny across different appointment scenarios. 
• Section 11(6B) clarifies that when the Supreme Court or High Court designates a person or institution to handle arbitrator appointments, this designation does not constitute a delegation of judicial power, preserving the courts' fundamental authority while enabling efficient administration of the appointment process.