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 334
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. The court clarified the extent to which a High Court can examine the validity of a settlement agreement when deciding whether to refer a dispute to arbitration. The bench comprised Chief Justice Dr Dhananjaya Y Chandrachud and Justice Pamidighantam Sri Narasimha, with the judgment authored by Justice Narasimha.

Case Background

NTPC Ltd. (NTPC) and M/S SPML Infra Ltd. (SPML) entered into a contract for the “Installation Services for Station Piping Package” at NTPC’s Simhadri project. SPML provided Performance and Advanced Bank Guarantees (Bank Guarantees) worth Rs. 14,96,89,136 to NTPC. After the successful completion of the project, NTPC issued a Completion Certificate on 27 March 2019. NTPC informed SPML on 10 April 2019, that the final payment would be released upon receipt of 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. SPML protested this action on 15 May 2019, arguing that the retention of the Bank Guarantees was unjustified. SPML then demanded 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 a Writ Petition in the Delhi High Court on 3 July 2019, seeking the release of the Bank Guarantees. The High Court issued an interim order on 8 July 2019, directing NTPC not to encash the Bank Guarantees, while SPML was directed to keep them alive.

Negotiations between the parties led to a Settlement Agreement on 27 May 2020. NTPC agreed to release the Bank Guarantees, and SPML agreed to withdraw its Writ Petition and not initiate any further 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 examined the correspondence between NTPC and SPML. It 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 while it would be difficult for SPML to prove economic coercion, the dispute over whether the contract was discharged by the Settlement Agreement was not “ex facie untenable, insubstantial or frivolous.”

The High Court referred to several Supreme Court decisions, including Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, Vidya Drolia and Ors. v. Durga Trading Corporation, Duro Felguera, S.A. v. Gangavaram Port Ltd., Sanjiv Prakash v. Seema Kukreja and Ors., and Oriental Insurance Co. Ltd. and Anr. v. Dicitex Furnishing Ltd., and allowed the Arbitration Petition. It appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC and directed the respective arbitrators to appoint the presiding Arbitrator.

Legal Framework

The case primarily revolves around Section 11(6) of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators. Specifically, Section 11(6) 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), which was added by the Arbitration and Conciliation (Amendment) Act 2015. Section 11(6A) states:

“(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.”

The court also considered the Dispute Resolution Clause 6.1 of the General Conditions of Contract which states:

“6.1.1 If any dispute of any kind whatsoever shall arise between the Employer and the Contractor in connection with or arising out of the Contract, including without prejudice to the generality of the foregoing, any question regarding its existence, validity or termination, or the execution of the Facilities- whether during the progress of the Facilities or after their completion and whether before or after the termination, abandonment or breach of the Contract- the parties shall seek to resolve any such dispute or difference by mutual consultation. If the parties fail to resolve such a dispute or difference by mutual consultation, then the dispute shall be referred in writing by either party to the Adjudicator, with a copy to the other party.”

The court also considered Clause 6.2 of the General Conditions of Contract which states:

“6.2.1 If either the Employer or the Contractor is dissatisfied with the Adjudicator’s decision, or if the Adjudicator fails to give a decision within twenty eight (28) days of a dispute being referred to it, then either the Employer or the Contractor may, within fifty six (56) days of such reference, give notice to the other party, with a copy for information to the Adjudicator of its intention to commence arbitration, as hereinafter provided, as to the matter in dispute, and no arbitration in respect of this matter may be commenced unless such notice is given.”

These provisions are crucial in determining the scope of judicial intervention at the pre-arbitration stage and the arbitrability of disputes after a settlement agreement.

Arguments

Arguments by NTPC:

• NTPC argued that the Settlement Agreement, dated 27 May 2020, was reached while the Writ Petition was pending before the High Court. Therefore, the allegations of coercion and economic duress were false.
• SPML never raised any claims during the contract’s subsistence, before the Completion Certificate was issued, or before the final payment was made.
• SPML waited for the release of the Bank Guarantees as per the Settlement Agreement before withdrawing the Writ Petition and then instituted the Arbitration Petition, which shows that the allegation of coercion was not bona fide.
• The High Court should have undertaken a limited scrutiny to examine whether the matter was prima facie arbitrable as per the decision of the Supreme Court in Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr.

Arguments by SPML:

• SPML argued that the legal principles governing an application under Section 11(6) of the Act are well-settled following the decisions of the Supreme Court in Mayavati Trading (supra) and Vidya Drolia (supra).
• At the pre-referral stage, the court’s jurisdiction is limited to examining whether an arbitration agreement exists between the parties.
• The question of whether the Settlement Agreement was executed under undue influence or coercion could be determined by an Arbitral Tribunal.

Sub-Submissions:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, however, the issues that the court considered are:

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 considering the settlement agreement between the parties.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267: This case established that the issue of non-arbitrability of a dispute has to be examined by the court in cases where accord and discharge of the contract is alleged.
• Union of India & Ors. v. Master Construction Co. (2011) 12 SCC 349: This case observed that when the validity of a discharge voucher, no-claim certificate, or settlement agreement is in dispute, the court must prima facie examine the credibility of the allegations before referring the parties to arbitration.
• New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. (2015) 2 SCC 424: This case observed that allegations of fraud, coercion, duress, or undue influence must be prima facie substantiated through evidence by the party raising the allegations.
• Duro Felguera, S.A. v. Gangavaram Port Ltd. (2017) 9 SCC 729: This case noted that post the 2015 Amendments, the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties.
• United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362: This case accepted an objection of ‘accord and satisfaction’ in opposition to an application for reference to arbitration. This case was later overruled.
• Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714: This case expressly overruled the decision in Antique Art Exports, stating that the law prior to the 2015 Amendment, which included examining whether accord and satisfaction had taken place, has now been legislatively overruled.
• Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1: This case laid down an overarching principle with respect to the pre-referral jurisdiction under Section 11(6) of the Act. It held that the expression “existence of an arbitration agreement” includes the aspect of validity of an arbitration agreement. It also held that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability.
• Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd. (2021) 5 SCC 671: This case referred the parties to arbitration as the prima facie review on the objection of non-arbitrability was found to be inconclusive.
• Sanjiv Prakash v. Seema Kukreja and Ors. (2021) 9 SCC 732: This case referred the parties to arbitration as the prima facie review on the objection of non-arbitrability was found to be inconclusive.
• BSNL and Anr. v. Nortel Networks India (P) Ltd. (2021) 5 SCC 738: This case refused arbitration as the claims of the parties were demonstrably time-barred.
• Secunderabad Cantonment Board v. B. Ramachandraiah & Sons (2021) 5 SCC 705: This case refused arbitration as the claims of the parties were demonstrably time-barred.
• Indian Oil Corporation Ltd. v. NCC Ltd. (2022) SCC OnLine SC 896: This case referred the parties to arbitration as the prima facie review on the objection of non-arbitrability was found to be inconclusive.
• Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr (2022 SCC OnLine SC 1328): This case was relied upon by NTPC to argue that the High Court was under an obligation to undertake a limited scrutiny to examine whether a matter is prima facie arbitrable.
• DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd (2021 SCC OnLine SC 781): This case was relied upon to explain that the court is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator.

Legal Provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators when the agreed procedure fails.
• Section 11(6A) of the Arbitration and Conciliation Act, 1996: This section limits the court’s examination to the existence of an arbitration agreement.

How Authorities Were Considered:

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 [CITATION] to emphasize the limited scope of judicial review under Section 11(6) and the principle that the arbitral tribunal is the preferred first authority to determine non-arbitrability.
• The Court distinguished the facts from Pravin Electricals [CITATION], Sanjiv Prakash [CITATION], and Indian Oil Corporation [CITATION], where arbitration was allowed due to inconclusive prima facie review, stating that in the present case, the claims were ex facie meritless.
• The Court relied on BSNL and Anr. v. Nortel Networks India (P) Ltd. [CITATION] and Secunderabad Cantonment Board v. B. Ramachandraiah & Sons [CITATION] to emphasize that arbitration can be refused if claims are demonstrably time-barred or meritless.
• The Court overruled United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. [CITATION], following Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman [CITATION], to clarify that the court’s role is limited to examining the existence of an arbitration agreement.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that SPML had entered into a Settlement Agreement, received the benefits of that agreement by way of release of Bank Guarantees, and then attempted to initiate arbitration. The court found that the allegations of coercion and economic duress were not bona fide and that the claims were raised as an afterthought. The court emphasized that the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and that the courts must protect parties from being forced to arbitrate when the matter is demonstrably non-arbitrable.

Fact:Law Ratio

The court’s reasoning was based more on the factual matrix of the case rather than the legal aspect as the court was of the opinion that the facts speak for themselves.

Logical Reasoning:

The court considered the alternative interpretation that the issue of coercion could be determined by the Arbitral Tribunal. However, the court rejected this interpretation based on the facts of the case, stating that the claims were ex facie meritless and dishonest. The court noted that the settlement agreement was comprehensive and that SPML had received the benefits of the agreement.

The court’s decision was based on the following reasons:

• The Settlement Agreement was entered into during the subsistence of the Writ Petition, and SPML had the protection of the High Court.
• The claims were not raised during the subsistence of the contract or before the final payment.
• The plea of coercion and economic duress was an afterthought.
• The claims were an attempt to initiate ex facie meritless, frivolous, and dishonest litigation.

The court also 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 standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves.”

“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.”

Key Takeaways

• The Supreme Court emphasized the limited scope of judicial review under Section 11(6) of the Arbitration and Conciliation Act, 1996.
• Courts should not refer disputes to arbitration if the claims are ex facie meritless, frivolous, or dishonest.
• Allegations of coercion and economic duress must be bona fide and not an afterthought.
• Settlement agreements, once acted upon, are binding and cannot be easily repudiated.
• The arbitral tribunal is the preferred first authority to determine non-arbitrability, but courtsare not powerless to reject demonstrably non-arbitrable claims.

Conclusion

The Supreme Court’s judgment in the NTPC vs. SPML case clarifies the scope of judicial intervention at the pre-arbitration stage, particularly when a settlement agreement is in place. It underscores that while the courts must respect the principle of minimal judicial interference in arbitration, they are not powerless to reject demonstrably non-arbitrable claims. The judgment serves as a reminder that settlement agreements, when entered into voluntarily and acted upon, are binding and that parties cannot easily repudiate them to initiate arbitration. This case reinforces the principle that arbitration is not a remedy for disputes that have already been settled and that allegations of coercion must be bona fide and not an afterthought. The judgment provides clarity to the legal fraternity and parties involved in commercial transactions about the importance of settlement agreements and the limited scope of judicial review in arbitration matters.