Supreme Court clarifies the limited scope of Section 11 of the Arbitration and Conciliation Act, 1996 in Goqii Technologies vs. Sokrati Technologies (2024)

Introduction

Date of the Judgment: 7th November 2024
Citation: 2024 INSC 853
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.

Can a court refuse to appoint an arbitrator if it believes a claim is dishonest, even if an arbitration agreement exists? The Supreme Court of India recently addressed this question in a dispute between Goqii Technologies and Sokrati Technologies. The court clarified that the role of a court under Section 11 of the Arbitration and Conciliation Act, 1996 is primarily to verify the existence of an arbitration agreement, not to assess the merits of the claims. This judgment underscores the pro-arbitration stance of Indian law, limiting judicial intervention at the initial stages of dispute resolution. The judgment was authored by Justice J.B. Pardiwala, with a bench comprising Chief Justice Dr. Dhananjaya Y. Chandrachud and Justice Manoj Misra.

Case Background

Goqii Technologies Private Limited (the appellant), a wellness company, hired Sokrati Technologies Private Limited (the respondent), a digital marketing firm, to manage its online advertising campaigns. They entered into a Master Services Agreement (MSA), which was later extended on 29th April 2022 for three years. Between August 2021 and April 2022, Goqii paid ₹5,53,26,690 to Sokrati for its services. However, after media reports in September 2022 alleged malpractices in the advertising industry involving Sokrati’s parent company, Dentsu International Limited, Goqii engaged an independent auditor to review Sokrati’s performance. The audit report, submitted in February 2023, indicated that the campaigns had a low return on investment, with an estimated overcharge of ₹4,48,53,580. The report also highlighted concerns about media buying costs, poor traffic, fraudulent clicks, and junk leads. Following the audit report, Sokrati issued a demand notice on 22nd February 2023 under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeking ₹6,25,67,060 from Goqii for outstanding invoices. In response, on 4th March 2023, Goqii rejected the demand, invoked the arbitration clause in the MSA, and filed a counterclaim for a refund of ₹5,53,26,690 with 18% interest, along with an additional ₹6 crore in damages. Subsequently, Goqii filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, before the High Court of Judicature at Bombay, seeking the appointment of an arbitrator. Meanwhile, Sokrati filed a petition under Section 9 of the IBC before the National Company Law Tribunal, Mumbai (NCLT, Mumbai) to initiate the corporate insolvency resolution process against Goqii.

Timeline

Course of Proceedings

The High Court of Judicature at Bombay dismissed Goqii’s application for the appointment of an arbitrator, stating that the application lacked merit and substance. The High Court observed that while the audit report highlighted poor returns on investment and inconsistent metrics, it did not support Goqii’s claims of fraudulent practices by Sokrati. The High Court further noted that Goqii failed to demonstrate substantial discrepancies that would justify withholding payment for the invoices raised by Sokrati. The court concluded that Goqii’s attempt to invoke arbitration based on a non-existent dispute was a manifestly dishonest claim. The High Court stated that while further investigation was suggested in the audit report, Goqii’s attempt to invoke arbitration was merely to avoid its liability for the claims under the invoices and defeat the proceedings before the NCLT. The High Court relied on the principle that a referral court must protect parties from being forced to arbitrate when the matter is demonstrably non-arbitrable.

Legal Framework

The primary legal provision in question is Section 11 of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators. This section outlines the procedure for appointing an arbitrator when parties fail to agree on one. The Supreme Court has clarified that the scope of judicial interference under Section 11 is limited to determining the existence of an arbitration agreement. The court’s role is not to delve into the merits of the dispute or assess the validity of the claims at this stage. The legislative intent behind the 2015 amendment to the Act was to minimize judicial intervention and promote arbitration as a swift and effective method of dispute resolution. The court also referred to the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Section 8 (Demand Notice by Operational Creditor) and Section 9 (Application for Initiation of Corporate Insolvency Resolution Process by Operational Creditor), which were invoked by the respondent.

Arguments

Appellant (Goqii Technologies) Arguments:

• The scope of interference by a referral court under Section 11 of the Arbitration and Conciliation Act, 1996 is limited to a preliminary inquiry to ascertain if a prima facie case exists for referring the dispute to arbitration.
• The High Court exceeded its jurisdiction by conducting a full review of the contested facts instead of limiting itself to the existence of the arbitration agreement.
• The High Court failed to consider the technical nature of the services rendered by Sokrati and the technical details in the audit report, which require subject-matter expertise for accurate determination of the disputes.
• The finding of dishonesty was based on the erroneous assumption that Goqii had not raised any dispute before the demand notice. The audit report was provided only in February 2023, after which Goqii invoked arbitration.
• Goqii had sent multiple emails to Sokrati raising objections regarding the invoices before the audit report.

Respondent (Sokrati Technologies) Arguments:

• Before referring parties to arbitration, the High Court must be satisfied that a genuine dispute exists.
• The mere inclusion of an arbitration clause does not make a matter automatically arbitrable. A prima facie case establishing the existence of a dispute must be made.
• The dispute raised by Goqii was an afterthought to avoid payment and was ex facie meritless, frivolous, and dishonest.
• Goqii is not entitled to any damages or refund as it did not raise any concerns or identify deficiencies while utilizing the services.
• The claim is unfounded, vague, and lacks supporting documentation.
• Goqii filed the petition with mala fide intent to create duplicative legal proceedings and evade liability for admitted dues and disrupt the CIRP process.

The innovativeness of the argument by the Appellant lies in emphasizing the technical nature of the dispute and the limited scope of judicial review under Section 11, while the Respondent innovatively argued that the dispute was an afterthought to avoid payment.

Submissions Table

Issues Framed by the Supreme Court

• Whether the High Court committed any error in dismissing the appellant’s application under Section 11 of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

Cases:

• In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, [2023 INSC 1066] – Supreme Court of India: This Constitution Bench judgment clarified that the scope of inquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement.
• SBI General Insurance Co. Ltd. vs. Krish Spinning, [2024 INSC 532] – Supreme Court of India: This case summarized the law on the scope and standard of judicial scrutiny under Section 11(6) of the Act, 1996, emphasizing that the scope of enquiry is limited to the scrutiny of prima facie existence of the arbitration agreement.
• Indian Oil Corporation vs. NCC Ltd., [(2023) 2 SCC 539] – Supreme Court of India: This case was cited by the respondent to argue that a prima facie case establishing the existence of a dispute must be made before referring the parties to arbitration.
• B&T AG v. Ministry of Defence, [2023 SCC OnLine SC 657] – Supreme Court of India: This case was also cited by the respondent to support the argument that the court must apply a prima facie test to weed out claims that are ex facie meritless, frivolous, or dishonest.
• Sushma Shiv Kumar Daga & Anr. vs. Madhur Kumar Ramkrishnaji Bajaj & Ors, [2023 SCC OnLine SC 1683] – Supreme Court of India: This case was cited by the respondent to fortify the submission that a prima facie case establishing the existence of a dispute must be made.

Legal Provisions:

• Section 11 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators. The court clarified that the scope of judicial interference under Section 11 is limited to determining the existence of an arbitration agreement.
• Section 8 of the Insolvency and Bankruptcy Code, 2016: This section deals with the demand notice by an operational creditor.
• Section 9 of the Insolvency and Bankruptcy Code, 2016: This section deals with the application for initiation of corporate insolvency resolution process by an operational creditor.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of minimal judicial interference at the stage of appointing an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The Court emphasized that the High Court exceeded its jurisdiction by delving into the merits of the dispute and assessing the auditor’s report. The Court underscored that the arbitral tribunal is equally, if not more, capable of deciding on the issues of frivolity and dishonesty in litigation. The Court’s reasoning focused on the legislative intent behind the 2015 amendment, which aimed to limit judicial scrutiny under Section 11 to the prima facie existence of an arbitration agreement. The Court also considered the pro-arbitration stance of Indian law, which favors arbitration as a speedy and effective method of dispute resolution. The Court’s decision also reflects a concern that parties should not be forced to participate in time-consuming and costly arbitration processes if the claims are non-existent or mala fide.

The court’s reasoning was driven more by legal principles and the interpretation of Section 11 of the Arbitration and Conciliation Act, 1996, than by the specific facts of the case.

Logical Reasoning

Judgment

The Supreme Court allowed the appeal filed by Goqii Technologies and set aside the impugned order passed by the High Court of Judicature at Bombay. The Court emphasized that the High Court had exceeded its jurisdiction by undertaking a detailed examination of the factual matrix and assessing the auditor’s report, which is beyond the scope of inquiry under Section 11 of the Arbitration and Conciliation Act, 1996. The Court reiterated that the scope of inquiry under Section 11 is limited to ascertaining the prima facie existence of an arbitration agreement. The Court also stated that the arbitral tribunal is equally, if not more, competent to adjudicate issues such as frivolity in litigation. The Court appointed Mr. S.J. Vazifdar, former Chief Justice of the Punjab & Haryana High Court, as the sole arbitrator to adjudicate the disputes between the parties. The Court clarified that all legal contentions, including objections, are kept open to be taken up before the learned Arbitrator.

The court quoted from the judgment:

• “In view of the observations made by this Court in In Re: Interplay (supra), it is clear that the scope of enquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement, and nothing else.”
• “The scope of inquiry under Section 11 of the Act, 1996 is limited to ascertaining the prima facie existence of an arbitration agreement.”
• “As observed in Krish Spinning (supra), frivolity in litigation too is an aspect which the referral court should not decide at the stage of Section 11 as the arbitrator is equally, if not more, competent to adjudicate the same.”

Key Takeaways

• The scope of judicial interference under Section 11 of the Arbitration and Conciliation Act, 1996 is limited to ascertaining the prima facie existence of an arbitration agreement.
• Referral courts should not delve into the merits of the dispute or assess the validity of the claims at the stage of appointing an arbitrator.
• The arbitral tribunal is competent to decide on issues such as the existence of a dispute, frivolity, and dishonesty in litigation.
• The judgment reinforces the pro-arbitration stance of Indian law, minimizing judicial intervention in arbitration proceedings.
• Parties should not misuse the limited jurisdiction of referral courts to force other parties into unnecessary arbitration.
• Arbitral tribunals may direct that the costs of arbitration be borne by the party found to have abused the process of law.

Directions

The Supreme Court appointed Mr. S.J. Vazifdar, former Chief Justice of the Punjab & Haryana High Court, as the sole arbitrator to adjudicate the disputes between the parties.

Development of Law

The ratio decidendi of this case is that the scope of judicial interference under Section 11 of the Arbitration and Conciliation Act, 1996 is limited to ascertaining the prima facie existence of an arbitration agreement. Referral courts should not delve into the merits of the dispute or assess the validity of the claims at this stage. This judgment reinforces the pro-arbitration stance of Indian law and clarifies the limited role of the courts at the initial stage of arbitration proceedings. The judgment does not introduce any new legal principle but reiterates the existing legal position and clarifies the interpretation of Section 11 in light of the 2015 amendment to the Act.

Conclusion

In conclusion, the Supreme Court’s judgment in Goqii Technologies Private Limited vs. Sokrati Technologies Private Limited clarifies the limited scope of judicial intervention under Section 11 of the Arbitration and Conciliation Act, 1996. The Court emphasized that the primary role of a referral court is to ascertain the existence of an arbitration agreement and not to assess the merits of the dispute. This decision reinforces the pro-arbitration stance of Indian law, promoting arbitration as a swift and effective method of dispute resolution. The judgment also highlights that issues of frivolity and dishonesty in litigation are best addressed by the arbitral tribunal, which is equally competent to adjudicate such matters. This ruling ensures that parties are not unduly burdened with unnecessary litigation and that arbitration proceedings are not delayed by excessive judicial intervention at the initial stage.