Supreme Court clarifies the scope of Section 11 of the Arbitration Act 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. (authored by J.B. Pardiwala, J.)

When can a court refuse to appoint an arbitrator despite an existing arbitration clause? The Supreme Court of India recently addressed this critical question in a dispute between Goqii Technologies and Sokrati Technologies, clarifying the extent of judicial intervention at the stage of appointing an arbitrator. This case highlights the delicate balance between respecting parties’ contractual agreements to arbitrate and preventing the misuse of arbitration for frivolous claims.

The Supreme Court, in this judgment, emphasized that the power of the court under Section 11 of the Arbitration and Conciliation Act, 1996, is limited to examining the prima facie existence of an arbitration agreement. The Court held that the High Court had overstepped its jurisdiction by delving into the factual merits of the case while deciding an application for the appointment of an arbitrator. This judgment reinforces the pro-arbitration stance of Indian law, limiting judicial interference at the preliminary stage.

Case Background

Goqii Technologies Private Limited (the appellant), a wellness company, entered into a Master Services Agreement (MSA) with Sokrati Technologies Private Limited (the respondent), a digital marketing agency, to manage its digital advertising campaigns. The MSA was extended on April 29, 2022, for three years with certain amendments. Between August 2021 and April 2022, Goqii paid ₹5,53,26,690 to Sokrati for its services. Subsequently, Goqii was in the process of paying 10 invoices raised between May 12, 2022, and October 7, 2022, when media reports surfaced in September 2022 alleging malpractices in the advertising industry, implicating major players including Dentsu International Limited, the parent company of Sokrati. The Economic Offences Wing, Mumbai, also lodged a complaint against Dentsu and its officials. Following these developments, Goqii engaged an independent auditor in November 2022 to review Sokrati’s activities from April 2021 to December 31, 2022. The auditor’s report, submitted in February 2023, concluded that the average return on investment (ROI) for the campaigns was significantly low, and estimated an overcharge of ₹4,48,53,580. The report also identified concerns such as inflated media buying costs, poor traffic, fraudulent clicks, and junk leads. On February 22, 2023, Sokrati issued a demand notice to Goqii under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeking ₹6,25,67,060 for outstanding invoices. Goqii rejected the demand on March 4, 2023, citing the audit findings, and invoked arbitration under Clause 18.12 of the MSA, also filing a counterclaim for a refund and damages. Following Sokrati’s failure to comply with the arbitration notice, Goqii filed an application before the High Court seeking the appointment of an arbitrator. While this application was pending, Sokrati filed a petition under Section 9 of the IBC before the National Company Law Tribunal (NCLT), Mumbai, to initiate the corporate insolvency resolution process of 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 audit report did not support Goqii’s claims of fraudulent practices by Sokrati. The High Court observed that while the report highlighted poor returns on investment and inconsistent metrics, it did not justify withholding payment for the invoices raised. The High Court concluded that Goqii’s attempt to invoke arbitration based on non-existent disputes was a dishonest claim. Aggrieved by this decision, Goqii appealed to the Supreme Court.

Legal Framework

The case primarily revolves around Section 11 of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators. The Supreme Court also referred to Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), relating to the issuance of demand notices for unpaid operational debt, and Section 9 of the IBC, regarding the initiation of corporate insolvency resolution process.

Section 11 of the Arbitration and Conciliation Act, 1996 states:

(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies and-

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment,

the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.

(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 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.

(6A) 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.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Supreme Court or to the High Court or to the person or institution designated by such Court is final and no appeal including a letters patent appeal shall lie against such decision.

(8) The Supreme Court or, as the case may be, the High Court, may make such rules as may be necessary to give effect to the provisions of this section.

(9) An application under this section shall be disposed of by the Supreme Court or the High Court, as the case may be, as expeditiously as possible and endeavor shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.

(10) The Supreme Court may, by notification, make rules for the purposes of carrying out the provisions of this section.

(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request.

(12) (a) Where the matters referred to in sub-sections (4), (5) and (6) fall within the jurisdiction of the High Court, and

(b) where the High Court has appointed a person or institution under sub-sections (4), (5) and (6),

the High Court may, if so deemed appropriate, transfer such matters to any Court subordinate to it.

Arguments

Appellant’s Submissions:

• 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 the prima facie existence of a case for arbitration.
• The High Court exceeded its jurisdiction by conducting a full review of the contested facts instead of limiting itself to a preliminary inquiry.
• The High Court failed to consider the technical details in the Audit Report, which require subject-matter expertise for dispute resolution.
• The finding of dishonesty against the appellant was erroneous as the appellant had no opportunity to raise disputes before the audit report was received in February 2023.
• The appellant had sent multiple emails to the respondent raising objections regarding the invoices even prior to the issuance of the Audit Report.

Respondent’s Submissions:

• The High Court must be satisfied that a genuine dispute exists before referring parties to arbitration.
• The mere presence of an arbitration clause does not automatically make a matter arbitrable.
• The court must dismiss claims that are ex facie meritless, frivolous, or dishonest.
• The dispute raised by the appellant is an afterthought.
• The appellant is not entitled to damages or refund as no concerns or deficiencies were raised while utilizing the services.
• The appellant has approached the court with mala fide intent to evade liability and disrupt the CIRP process before the NCLT.

Submissions Table

Issues Framed by the Supreme Court

The short question that falls for consideration is whether the High Court committed any error in dismissing the appellant’s application under Section 11 of the Act, 1996.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, Supreme Court of India: This Constitution Bench judgment clarified that the scope of inquiry at the stage of appointment of an arbitrator is limited to the scrutiny of the 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 prima facie existence of an 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 court must be satisfied that a genuine dispute exists before referring 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 a prima facie case establishing the existence of a dispute must be made.
• 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 court must dismiss claims that are ex facie meritless, frivolous, or dishonest.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899: The Supreme Court relied on this case to reiterate that the scope of inquiry under Section 11 is limited to the prima facie existence of an arbitration agreement.
• SBI General Insurance Co. Ltd. vs. Krish Spinning [2024 INSC 532]: The Supreme Court followed this case to emphasize that the referral court should not delve into the merits of the dispute, including the issue of frivolity, at the stage of Section 11.
• Indian Oil Corporation vs. NCC Ltd. [(2023) 2 SCC 539]: The Supreme Court distinguished this case, stating that while a genuine dispute is required, its determination is within the arbitrator’s purview.
• B&T AG v. Ministry of Defence [2023 SCC OnLine SC 657]: The Supreme Court distinguished this case, stating that while a genuine dispute is required, its determination is within the arbitrator’s purview.
• Sushma Shiv Kumar Daga & Anr. vs. Madhur Kumar Ramkrishnaji Bajaj & Ors [2023 SCC OnLine SC 1683]: The Supreme Court distinguished this case, stating that while a genuine dispute is required, its determination is within the arbitrator’s purview.

What weighed in the mind of the Court?

The Supreme Court emphasized several key points in its reasoning:

• The limited scope of judicial interference under Section 11 of the Arbitration Act, which is restricted to examining the prima facie existence of the arbitration agreement.
• The need to adhere to the legislative intent behind the 2015 amendment of the Act, which aimed to reduce judicial intervention at the stage of Section 11.
• The competence of the arbitral tribunal to decide on the merits of the dispute, including the frivolity of the claim, and the mala fides of the parties.
• The need to prevent the misuse of the limited jurisdiction of referral courts to force parties to participate in unnecessary arbitration proceedings.
• The importance of balancing the limited judicial scope with the interests of parties who might be constrained to participate in arbitration.

The Court’s reasoning was primarily based on legal principles and the interpretation of Section 11 of the Arbitration Act, with less emphasis on the specific factual aspects of the case.

The Supreme Court considered the High Court’s detailed examination of the audit report and the factual matrix as an overreach of its powers under Section 11. It emphasized that the arbitrator is competent to decide on the merits of the dispute, including the frivolity of the claim. The Court clarified that the limited jurisdiction of the referral court should not be misused to force parties into unnecessary arbitration proceedings. The Court also considered the legislative intent behind the 2015 amendment to the Arbitration Act, which aimed to limit judicial intervention at the stage of Section 11. The Court balanced the limited judicial scope with the interests of parties who might be constrained to participate in arbitration.

The Court observed, “The scope of inquiry under Section 11 of the Act, 1996 is limited to ascertaining the prima facie existence of an arbitration agreement.” It further noted, “In the present case, the High Court exceeded this limited scope by undertaking a detailed examination of the factual matrix.” The Court also stated, “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.”

The Court rejected the High Court’s finding that the appellant’s claim was dishonest, stating that the appellant had no prior opportunity to raise the disputes before receiving the audit report. The Court also clarified that the arbitrator can address issues of mala fide claims and frivolous disputes. The Court emphasized that while the referral court must ensure that a genuine dispute exists, the determination of the dispute’s validity is within the arbitrator’s purview.

Key Takeaways

• The scope of judicial interference under Section 11 of the Arbitration and Conciliation Act, 1996 is limited to the prima facie existence of an arbitration agreement.
• Referral courts should not delve into the factual merits of the dispute or assess the validity of claims at the stage of Section 11.
• The arbitral tribunal is competent to decide on the merits of the dispute, including the frivolity of claims and mala fides of the parties.
• Parties cannot misuse the limited jurisdiction of referral courts to force others into unnecessary arbitration proceedings.
• Arbitral tribunals may direct that the costs of arbitration shall be borne by the party which the Tribunal ultimately finds 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. The Court also clarified that all legal contentions, including objections, available to the respondent, are kept open to be taken up before the learned Arbitrator.

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 examining the prima facie existence of an arbitration agreement. The Supreme Court clarified that the referral court should not delve into the merits of the dispute, including the issue of frivolity, at the stage of Section 11. This judgment reinforces the pro-arbitration stance of Indian law, limiting judicial interference at the preliminary stage. It also clarifies that the arbitrator is competent to decide on the merits of the dispute, including the frivolity of the claim and the mala fides of the parties.

Conclusion

The Supreme Court’s judgment in Goqii Technologies Private Limited vs. Sokrati Technologies Private Limited clarifies the limited scope of judicial intervention 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 factual merits of the case and that the arbitrator is competent to decide on the merits of the dispute. This decision reinforces the pro-arbitration stance of Indian law and ensures that parties are not unduly burdened by unnecessary judicial scrutiny at the preliminary stage of arbitration.

Disclaimer

This analysis is for informational purposes only and should not be considered legal advice. For any legal matters, it is recommended to consult with a qualified legal professional.