Introduction 

• This is a landmark judgment where the Supreme Court laid down the jurisdiction of the Court at the pre-referral stage. 
• The judgment was delivered by Chief Justice DY Chandrachud and Justice PS Narsimha.  

Facts 

• The Appellant (NTPC) and the Respondent (SPML) entered into a contract for Installation Services for Station Piping. 
• In terms of the contract SPML furnished Performance Bank Guarantees and Advanced Bank Guarantees. 
• Upon completion of the project the certificate was issued by NTPC. 
• NTPC informed SPML that the final payment would be released upon the receipt of a No-Demand Certificate from SPML. The same was issued and NTPC also released final payment. 
• However, the Bank Guarantees were withheld and NTPC informed SPML that the same were withheld on account of pending liabilities and disputes between the parties with respect to other projects.  
• SPML protested and contended that the retention of Bank Guarantee was unjustified.  
• SPML called upon NTPC to appoint an Adjudicator for resolving pending disputes in terms of the contract. 
• SPML filed a writ petition in the Delhi High Court as no action was taken by NTPC. 
• Pending the writ petition negotiations between the parties started and resulted in a Settlement Agreement. 
• Following the above the Bank Guarantees were released by NTPC and SPML withdrew the Writ Petition. 
• SPML repudiated the settlement Agreement and filed the present application under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (A & C Act).   
• In this petition SPML alleged coercion and economic duress in execution of the Settlement Agreement. 
• SPML averred that NTPC failed to appoint an arbitrator in spite of repeated requests. 
• In it’s reply NTPC raised two fold objections: 
  • SPML failed to follow the mandatory pre-arbitration procedure of first referring the dispute to an Adjudicator. 
  • The disputes between the parties were settled under the Settlement Agreement. 
  • The allegations of fraud and coercion were denied as false. 
• The High Court allowed the application filed under Section 11 (6). Hence, an appeal was filed in the Supreme Court. 

Issue Involved  

• Whether the application under Section 11 (6) of the A & C Act should be allowed? 

Observations 

• The Court in this case discussed the law with respect to the pre-referral jurisdiction. 
• The Court further referred to Article 11 (6A) of the A & C Act which has been inserted by way of amendment in 2015. 
  • The Supreme Court or, as the case may be, the High Court, while considering any application under subsection (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. 
• The Court held that in view of 2015 Amendment the jurisdiction of the Court under Section 11 (6) of the Act is limited to examining if an arbitration agreement exist between the parties.  
• The limited test at the stage of Section 11 (6) of the Act is therefore that of ‘prima facie review’. Thus, at this stage the Court should not get lost in thickets and not conduct mini trial. 
• Eye of needle test: 
  • The position of law is that the pre-referral jurisdiction of the Courts under Section 11 (6) 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. 
• Thus, a prima facie scrutiny of facts should be done which must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. even if there is the slightest doubt, the rule is to refer the dispute to arbitration. 
• Thus, the Court while exercising the 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. 
• The Court applied the principles in the facts of the case and held that the allegations of coercion and economic duress are not bonafide. 
• The Supreme Court held that these are the kind of cases where the Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation. 
• The Supreme Court observed that these are the kinds of cases where the High Court should exercise the restricted and limited review to check and protect the parties from being forced to arbitrate. 
• Thus, the Court held that the High Court committed an error in allowing application under Section 11 (6) of the Act.  

Conclusion 

• The Court in this case talked about pre-referral jurisdiction of the Court under Section 11 (6) of the A & C Act. 
• The Court held that at the stage of Section 11 (6) the inquiry by the Court is very limited. Infact the inquiry is only limited to two issues: whether a valid arbitration exist between the parties and whether the dispute is arbitrable.