Supreme Court Sets Narrow Scope for Pre-Referral Jurisdiction in Arbitration Matters

In a recent judgment, the Supreme Court of India clarified the scope and limitations of the pre-referral jurisdiction of courts under Section 11(6) of the Arbitration and Conciliation Act, 1996. The bench comprising Chief Justice Dr Dhananjaya Y Chandrachud and Justice Pamidighantam Sri Narasimha emphasized the restricted role of the courts in examining the existence and validity of an arbitration agreement. The decision highlights the need for a prima facie review of claims to prevent frivolous and meritless litigation.

The court emphasized that the primary inquiry under Section 11(6) is to determine the existence and validity of the arbitration agreement. The bench referred to the legislative amendments introduced by the Arbitration and Conciliation (Amendment) Act, 2015, which confined the court's examination solely to the existence of the arbitration agreement. The court cited the case of Duro Felguera, where it was held that the court's jurisdiction is limited to this examination - "nothing more, nothing less."

However, the court noted that certain exceptions exist. In the case of United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd., the court had accepted an objection of "accord and satisfaction" in opposition to an application for reference to arbitration. This approach was subsequently reversed in the case of Mayavati Trading, where the court overruled the decision in Antique Art Exports, stating that the law prior to the 2015 Amendment had been legislatively overruled.

The court further clarified the standard of scrutiny at the pre-referral stage, stating that it should be a prima facie review. This review should not delve into the merits of the case but should focus on whether the subject matter is prima facie arbitrable under a valid arbitration agreement. The court stressed the importance of protecting parties from being forced into arbitration when the matter is clearly non-arbitrable.

Analyzing the facts of the case before them, the court concluded that the allegations of coercion and economic duress in the execution of a settlement agreement lacked bona fide. The court noted that the settlement agreement had been executed during the pendency of a writ petition, where SPML (the petitioner) had complete protection from the court. After reaping the benefits of the settlement agreement, SPML attempted to wriggle out of its terms by issuing a letter of repudiation. The court found that the claims sought to be submitted to arbitration were raised as an afterthought and lacked credibility.

Consequently, the Supreme Court held that the High Court erred in allowing the application under Section 11(6) of the Act. It emphasized that the High Court should have exercised the prima facie test to screen and strike down meritless and dishonest litigation. The decision underscores the importance of upholding the integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

Date of Decision: April 10, 2023

NTPC LTD. vs M/S SPML INFRA LTD.