Bench: Justice D.Y Chandrachud and Justice P.S Narasimha
Background Of Case:
SPML had entered a contract with NTPC for installation services at NTPC’s Simhadri super thermal power project. For the project, SPML had furnished bank guarantees totaling Rs. 14,96,89,136. As per the terms and conditions laid down in the contract, the bank guarantees were supposed to be released after the completion of the project. However, despite SPML producing a completion certificate for the abovementioned project, NTPC failed to release the bank guarantees. Furtherance to which SPML requested to release the bank guarantees on several occasions, NTPC refused to do so on the grounds of other pending liabilities by the SPML.
Following the conversations between SPML and NTPC, SPML issued a notice to NTPC to appoint an adjudicator within thirty days as per the Dispute resolution clause as mandated under Clause 6 of the general conditions contract. Although SPML had appointed an adjudicator from their side, NTPC was constantly delaying this decision. Hence, SPML filed a writ petition under Article 226 in the Delhi High Court for the release of the bank guarantees.
Thereafter a response was sent by the NTPC to SPML’s notice through a letter, seeking an amicable settlement through the constitution of an Expert Selection Council (ESC). They also gave assurance to SPML that if ESC failed to resolve the dispute, then they would refer the case to arbitration. SPML agreed to settle the dispute amicably on the condition that they will invoke the arbitration clause if the bank guarantees are not released within 30 days.
While negotiating, NTPC proposed that they would release the bank guarantees if SPML withdrew their arbitration notice. SPML agreed to do so and they withdrew their notice on 21/12/2019, conditional on Bank Guarantee’s release by 20/01/2020. Thereafter, during the pendency of the writ, NTPC proposed a settlement agreement, linking it to the release of the bank Guarantee. SPML signed the settlement agreement under duress, after which NTPC released the expired bank guarantees. SPML withdrew its writ petition.
Decision of the Delhi High Court
SPML, post-agreement, sought the appointment of an arbitrator, claiming economic duress during the formation of the agreement. On April 8, 2021, The Delhi High Court appointed an arbitral tribunal in the petition filed by SPML under Section 11(6) of the Arbitration and Conciliation Act, 1996. The Court placed reliance upon the case of “Vidya Drolia and Ors. v. Durga Trading Corporation” [7 (2021) 2 SCC 1] 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.
Take of Supreme Court on the present case:
The appeal to the Supreme Court arises from the decision of the Delhi High Court. The court analyzed the pre-referral jurisdiction scope, pre and post-the 2015 amendment. In this case, the court followed the ‘eye of the needle’ approach as they examined the validity of the arbitration agreement and dispute arbitrability.
The court upheld the validity of the settlement agreement and opined that the agreement did not novate the original contractual agreement. It was merely an agreement to withdraw SPML’s claims for the release of bank guarantee. The apex court clarified the scope of pre-referral jurisdiction under the arbitration act and determined that once the parties are engaged in the arbitration agreement, the court must refer the parties to arbitration to resolve the issue.
On October 4, 2023, the court found the agreement to be comprehensive and executed under an interim order and noted that there were no disputes about its terms or the bank guarantee release. The court viewed the subsequent actions of SPML to evade the terms of the agreement. Hence the claims of SPML were dismissed as frivolous and insincere. The Apex Court held that the High Court had committed error in allowing the application under Section 11(6) of the Act. High Court ought to have examined the issues of the final settlement of disputes in the context of the principles laid down in Vidya Drolia apex court believed the Delhi High Court should have assessed the genuineness of the claim rather than merely referring to arbitration.
[1] THE ARBITRATION AND CONCILLATION ACT (AMENDMENT), 2015, §11(6)
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