Supreme Court Settles Arbitrability of Disputes After Settlement Agreement in NTPC vs. SPML Case (2023)

Date of the Judgment: 10 April 2023

Citation: 2023 INSC 318

Judges: Dr Dhananjaya Y Chandrachud, CJI, Pamidighantam Sri Narasimha, J.

Can a party initiate arbitration after entering into a settlement agreement and receiving the benefits of that agreement? The Supreme Court of India recently addressed this question in a case between NTPC Ltd. and M/S SPML Infra Ltd., clarifying the scope of judicial review in arbitration matters. The core issue was whether SPML could pursue arbitration after having settled its disputes with NTPC through a settlement agreement, which included the release of bank guarantees and withdrawal of a pending writ petition. The Supreme Court, in a judgment authored by Justice Pamidighantam Sri Narasimha, held that the High Court should have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia vs. Durga Trading Corporation [(2021) 2 SCC 1] and set aside the order of the High Court.

Case Background

NTPC and SPML entered into a contract for “Installation Services for Station Piping Package” at Simhadri. SPML provided Performance Bank Guarantees and Advance Bank Guarantees worth Rs. 14,96,89,136/- to NTPC. After the project’s successful completion, NTPC issued a Completion Certificate on 27 March 2019. NTPC informed SPML on 10 April 2019 that the final payment would be released upon receiving a No-Demand Certificate from SPML. SPML issued the No-Demand Certificate on 12 April 2019, and NTPC released the final payment of Rs. 1,40,00,000/- in April 2019. However, NTPC withheld the Bank Guarantees.

On 14 May 2019, NTPC informed SPML that the Bank Guarantees were withheld due to pending liabilities and disputes related to other projects at Bongaigon, Barh, and Korba. SPML protested this action on 15 May 2019, arguing that retaining the Bank Guarantees despite the Completion Certificate and No-Demand Certificate was unjustified. SPML then raised a demand of Rs. 72,01,53,899/- from NTPC for liabilities under the same contract.

On 12 June 2019, SPML requested NTPC to appoint an Adjudicator to resolve the disputes. When NTPC failed to respond, SPML filed Writ Petition No. 7213 of 2019 in the Delhi High Court under Article 226 of the Constitution, seeking the release of the Bank Guarantees. The High Court, on 8 July 2019, directed NTPC not to encash the Bank Guarantees and directed SPML to keep them alive.

Pending the Writ Petition, the parties reached a Settlement Agreement on 27 May 2020. NTPC agreed to release the withheld Bank Guarantees, and SPML agreed to withdraw its pending Writ Petition and not initiate any other proceedings, including arbitration, under the contract. NTPC released the Bank Guarantees on 30 June 2020, and SPML withdrew the Writ Petition on 21 September 2020.

Subsequently, SPML repudiated the Settlement Agreement and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 on 10 October 2020, alleging coercion and economic duress in the execution of the Settlement Agreement.

Timeline

Course of Proceedings

The Delhi High Court, in its order dated 8 April 2021, allowed SPML’s application under Section 11(6) of the Arbitration and Conciliation Act, 1996, for the constitution of an Arbitral Tribunal. The High Court rejected NTPC’s contention that SPML should have first resorted to an alternative dispute resolution mechanism, noting that SPML had previously requested this, but NTPC failed to respond. Regarding the allegation of economic duress in signing the Settlement Agreement, the High Court stated that it could not accept that the dispute about whether the Contract Agreement stood discharged was “ex facie untenable, insubstantial or frivolous.” The High Court appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC.

Legal Framework

The Supreme Court examined the pre-referral jurisdiction of the High Court under Section 11 of the Arbitration and Conciliation Act, 1996. Section 11(6) of the Act states:

“(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.”

The Court also considered Section 11(6A) of the Act, which was added by the Arbitration and Conciliation (Amendment) Act 2015:

“(6-A) 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.”

Arguments

Arguments by NTPC:

• The Settlement Agreement dated 27 May 2020, was reached during the pendency of the Writ Petition before the High Court, making the allegations of coercion and economic duress false.
• SPML never raised any claims during the subsistence of the contract, before the Completion Certificate was issued, or before the final payment was made.
• SPML’s conduct in waiting for the release of the Bank Guarantees as per the Settlement Agreement before withdrawing the Writ Petition and then instituting the Arbitration Petition showed that the coercion allegation was not bona fide.
• The High Court was obligated to undertake a limited scrutiny to examine whether a matter is prima facie arbitrable.

Arguments by SPML:

• The legal principles governing an application under Section 11(6) of the Act are well-settled, and the jurisdiction of the court is restricted to examining whether an arbitration agreement exists.
• The question of whether the Settlement Agreement was executed under undue influence or coercion should be determined by an Arbitral Tribunal.

Issues Framed by the Supreme Court

The Supreme Court did not frame any specific issues but dealt with the following:

1. Whether the High Court was correct in allowing the application under Section 11(6) of the Arbitration and Conciliation Act, 1996.
2. Whether the dispute was arbitrable in light of the Settlement Agreement.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

• The Court relied on Vidya Drolia vs. Durga Trading Corporation [(2021) 2 SCC 1]* to emphasize the limited scope of judicial review at the pre-referral stage and that the arbitral tribunal is the preferred first authority to determine non-arbitrability.
• The Court distinguished United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. [(2019) 5 SCC 362]*, which was overruled by Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman [(2019) 8 SCC 714]*, clarifying that the court’s role is limited to examining the existence of an arbitration agreement.
• The Court followed the principles laid down in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. [(2009) 1 SCC 267]*, Union of India & Ors. v. Master Construction Co. [(2011) 12 SCC 349]*, and New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. [(2015) 2 SCC 424]* to emphasize the need for a prima facie examination of the allegations.
• The Court referred to Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]* to highlight the limited jurisdiction of the court under Section 11(6) of the Act.
• The Court cited Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd. [(2021) 5 SCC 671]*, Sanjiv Prakash v. Seema Kukreja & Ors. [(2021) 9 SCC 732]*, and Indian Oil Corporation Ltd. v. NCC Ltd. [(2022) SCC OnLine SC 896]* to illustrate cases where parties were referred to arbitration due to inconclusive prima facie reviews.
• The Court also cited BSNL & Anr. v. Nortel Networks India (P) Ltd. [(2021) 5 SCC 738]* and Secunderabad Cantonment Board v. B. Ramachandraiah & Sons [(2021) 5 SCC 705]* to illustrate cases where arbitration was refused due to demonstrably time-barred claims.
• The Court relied on DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd. [2021 SCC OnLine SC 781]* to emphasize that the court is not expected to act mechanically to deliver a purported dispute to the chosen arbitrator.
• The Court cited Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr [2022 SCC OnLine SC 1328]* to emphasize that the High Court was under an obligation to undertake a limited scrutiny to examine whether a matter is prima facie arbitrable.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Lack of Bona Fide Claims: The Court noted that SPML did not raise any claims during the subsistence of the contract or before the final payment was released. The claim of Rs. 72,01,53,899/- was raised only after NTPC withheld the Bank Guarantees, and this claim was not even mentioned in the Writ Petition filed by SPML.
• Settlement Agreement: The Court emphasized that the Settlement Agreement was entered into voluntarily by SPML during the pendency of the Writ Petition, where it had the protection of the High Court. SPML agreed not to initiate any further proceedings, including arbitration, and received the benefit of the release of the Bank Guarantees.
• Afterthought Claims: The Court found that SPML’s allegations of coercion and economic duress were an afterthought, made only after receiving the benefits of the Settlement Agreement. The repudiation of the agreement and the subsequent filing of the arbitration petition were seen as attempts to wriggle out of the terms of the Settlement Agreement.
• Limited Scrutiny: The Court reiterated the principle that while the court’s jurisdiction under Section 11(6) is limited, it must still conduct a prima facie review to ensure that the claims are not ex facie meritless, frivolous, or dishonest.

Logical Reasoning:

The Court considered the alternative interpretation that the issue of coercion and economic duress should be decided by the Arbitral Tribunal but rejected it. The Court held that the facts of the case clearly demonstrated that the claims were an afterthought and that the High Court should have exercised its limited scrutiny to prevent the parties from being forced to arbitrate a non-arbitrable dispute. The Court emphasized that its role was to cut off “deadwood” and prevent the wastage of public and private resources.

The Supreme Court’s decision was unanimous, with both judges concurring in the final judgment. The Court set aside the High Court’s order and allowed the appeal.

The Supreme Court quoted from the judgment:

“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.”

“The plea of coercion and economic duress must be seen in the context of the execution of the Settlement Agreement not being disputed, and its implementation leading to the release of the Bank Guarantees on 30.06.2020 also not being disputed.”

“The sequence of events leads us to conclude that the letter of repudiation was issued only to wriggle out of the terms of the Settlement Agreement.”

Key Takeaways

• A party cannot initiate arbitration after entering into a settlement agreement and receiving the benefits of that agreement, if the claims are demonstrably an afterthought and lack bona fides.
• The court has a duty to conduct a prima facie review to ensure that the claims sought to be submitted to arbitration are not ex facie meritless, frivolous, or dishonest.
• The limited scrutiny by the court is to protect parties from being forced to arbitrate non-arbitrable disputes and to prevent the wastage of public and private resources.
• Allegations of coercion and economic duress must be substantiated with credible evidence and not be an afterthought.

Directions

The Supreme Court did not issue any specific directions in this case.

Development of Law

The ratio decidendi of this case is that a party cannot initiate arbitration after entering into a settlement agreement and receiving the benefits of that agreement, if the claims are demonstrably an afterthought and lack bona fides. This judgment reinforces the principle laid down in Vidya Drolia (supra) regarding the limited scope of judicial review at the pre-referral stage and the need for the court to exercise its jurisdiction to prevent frivolous and dishonest litigation. This case also clarifies that the court should not act mechanically to refer disputes to arbitration, especially when the claims are ex facie non-arbitrable.

Conclusion

The Supreme Court’s judgment in NTPC Ltd. vs. M/S SPML Infra Ltd. clarifies the scope of judicial review in arbitration matters, particularly when a settlement agreement has been reached and implemented. The Court emphasized that while the jurisdiction of the court under Section 11(6) of the Arbitration and Conciliation Act, 1996, is limited, it must still conduct a prima facie review to ensure that the claims are not ex facie meritless, frivolous, or dishonest. The Court set aside the High Court’s order, reinforcing the importance of upholding settlement agreements and preventing parties from using arbitration as a means to escape their contractual obligations. This judgment serves as a reminder that the courts must exercise their limited jurisdiction to protect parties from being forced to arbitrate non-arbitrable disputes, thus preventing the wastage of public and private resources.

Category

Parent Category: Arbitration Law

Child Categories:
✓ Section 11, Arbitration and Conciliation Act, 1996
✓ Settlement Agreement
✓ Arbitrability of Disputes
✓ Prima Facie Review
✓ Coercion and Economic Duress

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories:
✓ Section 11, Arbitration and Conciliation Act, 1996

FAQ

Q: Can I initiate arbitration after signing a settlement agreement?

A: Generally, no. If you’ve entered into a settlement agreement and received its benefits, you can’t initiate arbitration on the same issues unless there’s a valid reason to challenge the settlement itself.

Q: What is the court’s role when someone applies for arbitration?

A: The court’s role is limited. It checks if an arbitration agreement exists and if the claims are not obviously without merit. It doesn’t fully review the case but does a basic check to prevent frivolous cases.

Q: What is considered a ‘frivolous’ claim in arbitration?

A: A claim is frivolous if it’s an afterthought, made after a settlement, or if it lacks any real basis. The court will look to see if the claim is genuine or just an attempt to avoid a valid agreement.

Q: What happens if I claim I was forced to sign a settlement agreement?

A: You need to provide strong evidence of coercion or economic duress. It’s not enough to simply claim it. The court will examine the circumstances to see if your claim is genuine.

Q: What is ‘prima facie’ review?

A: ‘Prima facie’ review is a basic check. The court looks at the case quickly to see if it’s worth pursuing. It’s not a full trial but a quick look to weed out obviously weak cases.