NTPC LTD. VERSUS M/S SPML INFRA LTD.

AUTHOR: PRIYANSHU TYAGI, MEWAR LAW INSTITUTE

ABSTRACT / HEADNOTE

In the Current case, National Thermal Plant Corporation Ltd or NTPC Ltd.( the appellant) approached The Hon’ble Supreme Court of India challenging the decision of Delhi High Court dated 08.04.2021 in favour of  M/s SPML Infra Ltd. ( the respondent) which allowed the respondent’s application to constitute the Arbitral Tribunal under section-11(6) of The Arbitration and Conciliation Act , 1996.

NTPC Ltd. filed civil appeal challenging Whether the High Court had the power and jurisdiction to refer the parties to arbitration under Section – 11(6) of the Arbitration and Conciliation Act , 1996, after the parties had entered into a Settlement Agreement which recorded that there were no subsisting issues pending between the parties.

After hearing both the parties, the bench of HMJ Pamidighantam Sri Narasimha of supreme court set aside the High court of Delhi decision of 08.04.2021 and ruled in favour of  the appellant (NTPC Ltd.) clarifying the purview of the pre-referral jurisdiction under Section-11(6) of the Arbitration and Conciliation Act,1996 and pronounced its judgement on 10 May 2023.

Keywords: Settlement Agreement , Arbitration Agreement , Bank                                                                  Guarantees , Economic Duress, Arbitration application , Repudiation , Prima facie test, Completion Certificate , Writ Petition.

CASE DETAILS

Judgement Cause TitleNTPC LTD. vs. M/S SPML INFRA LTD.
Case NumberCivil Appeal – 4778 of 2022
Judgement DateApril 10 , 2023
CourtSupreme Court of India
QuorumHMJ Pamidighantam Sri Narasimha
AuthorCJI Dr. Dhananjaya Y Chandrachud HMJ Pamidighantam Sri Narasimha
CitationSCC OnLine SC 389
Legal Provisions InvolvedArticle-226 The Constitution of India Section-11(6) The Arbitration and Conciliation Act,1996

INTRODUCTION AND BACKGROUND OF JUDGEMENT

  • NTPC Ltd. (Appeallant) and M/S SPML Infra Ltd. (Respondent) entered into a contract for establishment of station piping package at the Simhadri Super Thermal Power Project Stage – 2 in Vishakhapatnam Andhra Pradesh.
  • As a part of contractual obligations, SPML supplied performance bank guarantees and advanced bank guarantees totalling INR 14,96,89,136/- to secure NTPC.
  • Upon favourable completion of the Project-2 at Simhadri, NTPC issued accomplishment certificate to SPML Infra.
  • Further NTPC informed SPML that the definitive payment would be given  upon SPML’s issuance of no-demand guarantee.
  • M/S SPML Infra Ltd. issued the no-demand certificate and NTPC Ltd. freed the definitive amount of INR 1,40,00,000/-. However NTPC Ltd. concealed the bank guarantees on account of pending liabilities and disputes related to other projects at Bongaigon, Barh and Korba.
  • Upon this operation of NTPC Ltd., SPML disapproved and demanded a sum of INR 72,01,53,899/- from NTPC as recoverable debts.
  • For resolution of the pending disputes, SPML Infra Ltd. requested NTPC Ltd. to appoint an Adjudicator for dispute resolution as specified in contract.
  • NTPC Ltd. not taken any action regarding this request.

As a result of SPML Infra Ltd. approached Delhi High Court by filing writ petition under Article-226 of Indian Constitution seeking the release of guarantees.

  • The Delhi High Court directed NTPC Ltd. not to invoke bank guarantees.
  • While the writ petition was pending before the High Court of Delhi, both the parties settled their disputes and entered into a settlement agreement and NTPC Ltd. freed the bank guarantees according to agreement.
  • However, after 3 weeks after releasing of the bank guarantees and after 2 months of the settlement agreement , SPML Ltd. issued a letter of repudiation , alleging coercion and economic duress during the settlement agreement’s execution.
  • As a consequence, SPML Ltd. rejected the settlement agreement and  filed an application under Section -11(6) of the arbitration and conciliation act,1996 before the Hon’ble Delhi High Court on October 10th, 2020.

FACTS OF THE CASE

  1. NTPC Ltd. (the appellant) and SPML Infra Ltd. (the respondent) entered into a contract for Installation Services for Station Piping Package for Simhadri Super Thermal Power Plant Project Stage-II at NTPC at Simhadri Vishakhapatnam Andhra Pradesh.
  2. Afterwards successful project accomplishment , NTPC issued an Accomplishment Certificate to  M/S SPML Infra Ltd.
  3. NTPC professed that there was no subsisting disputes between the parties on account of a settlement agreement dated May 27, 2020.
  4. SPML Ltd. approached the Delhi High Court by filing writ petition  seeking the release of Bank Guarantees that NTPC had concealed.
  5. In the Arbitration petition, SPML Infra alleged that the execution of settlement agreement was done under coercion and economic duress.
  6. The Delhi High Court allowed SPML’s application under Section-11(6) of the Arbitration and Conciliation Act, 1996, for the constitution of an Arbitral Tribunal.
  7. NTPC asserted that the arbitration application was a reconsideration and abuse of proceedings.
  8. NTPC appealed the decision of Delhi High Court in the Supreme Court.
  9. The Supreme Court set aside the Delhi High Court’s decision.
  10. The Supreme Court held that High Court of Delhi should have examined the issue of the final settlement of disputes in the context of the principles laid down in the case of Vidya Drolia and Ors. Vs. Durga Trading Corporation.

LEGAL ISSUES RAISED

Whether the High Court had the power and jurisdiction to refer the parties to arbitration under Section – 11(6) of the Arbitration and Conciliation Act , 1996, after the parties had entered into a Settlement Agreement which recorded that there were no subsisting issues pending between the parties.

PETITIONER/ APPELLANT’S ARGUMENTS

  1. The counsels for Petitioner / Appellant submitted that the settlement agreement, which freed NTPC from all its liabilities, were not right. They contend that it was signed under economic coercion because it was dependent upon the release of bank guarantees that NTPC had concealed for several years.
  2. Counsel for petitioner raised concerns about the circumstances surrounding the execution of the settlement agreement and asserted that it was not freely entered into.
  3. The petitioner’s counsel submitted that NTPC persisted to withhold the bank guarantees even after the settlement agreement was executed.
  4. The petitioner’s counsel also submitted that SPML faced financial constraints due to the concealed bank guarantees, which affected their ability to fulfil their contractual  obligations.
  5. The petitioner’s counsel argued that SPML’s consequent rejection of the settlement agreement was unjustified, and these actions were inconsistent and raised questions about their bona fides of their rejection.
  6. The petitioner’s counsel challenged SPML’s application under Section-11(6) of the Arbitration and Conciliation Act, 1996.
  7. The petitioner’s counsel contended that the learned High Court should have exercised the prima facie test to screen out meritless and dishonest litigation.
  8. The final submission by petitioner counsel was that the settlement agreement had stamped out all claims and disputes between the parties, rendering the arbitration application was baseless.

RESPONDENT’S ARGUMENTS

  1. The counsel for respondent submitted that the settlement agreement, which freed NTPC from all liabilities was valid.
    1. The counsel for respondent contended that settlement agreement was executed voluntarily and without any coercion or duress.
    1. The respondent’s counsel sustained that the settlement agreement substituted any prior disputes and resolved all issues between the parties.
    1. The respondent’s counsel indicated  that NTPC concealed the bank guarantees even after the settlement agreement was executed.
    1. The respondent’s counsel also submitted that bank guarantees were unfairly concealed, causing financial strain to SPML.
    1. The respondent’s counsel maintained that bank guarantees should have been freed instantly upon the completion of the project.
    1. The respondent’s counsel defended the SPML Ltd. application under Section-11(6) of the Arbitration and Conciliation Act , 1996.
    1. The respondent’s counsel finally submitted that settlement agreement did not excluded SPML from seeking arbitration for distinguishing claims and sustained that the High Court uprightly referred the parties to arbitration based on the existing dispute between the parties.

RELATED LEGAL PROVISIONS

SECTION -11(6) THE ARBITRATION AND CONCILIATION ACT,1996 :

Where, under an appointment procedure agreed upon by the parties, —

  1. (a) a party fails to act as required under that procedure; or
    1. (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure : or
    1. (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, 13[the appointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in case of international commercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

JUDGEMENT

Ratio Decidendi

  1. The Apex  Court emphasized that since in its judgement in SBP & Co. vs. Patel Engg.Ltd. and National Insurance Co. Ltd. vs. Boghara Polyfab Pvt.Ltd. had comprehended the scope of enquiry under section 11 of the Arbitration Act, the parliament amended the Arbitration Act in 2015, thereby presenting Section-11(6A).
  2. Under Section-11(6A) of the Arbitration Act, the court while exercising referral jurisdiction would be required to limit itself “to the examination of the existence of an arbitration agreement”. The Supreme Court cited its judgement in Duro Felguera,S.A vs. Gangavaram Port Ltd. and observed that following the insertion of Section-11(6A), the referral jurisdiction of the court “is limited to examining whether an arbitration agreement exists between the parties-nothing more, nothing less”.
  3. The Supreme Courts holds that the High Court has committed an error in allowing the application under Section-10(6) of the Act.
  4. High Court ought to have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia (supra).
  5. In Vidya Drolia vs. Durga Trading Corporation., The Supreme Court asserted that the court must undertakes a “ prima facie review” at the referral stage. The prima facie review is not entire review but a basic review to check out evidently and ex-facie non-existent and invalid arbitration agreement and non-arbitrable disputes.
  6. For the reasons stated above, the decision of the High Court of  Delhi in Arbitration Petition No.477 of 2020, dated 08.04.2021, is set aside, and Civil Appeal No.4778 of 2022 stands allowed.
  7. The Supreme Court also held that the parties shall bear their own costs.

Obiter Dicta

  1. The Apex Court pointed out that the court should not act mechanically but scrutinize the cases through the “eye of the needle” , which in the opinion of the Supreme Court is “necessary and compelling.”
    1.  The eye of the needle approach involves a two-fold inquiry :
  2. The Primary inquiry involves a thorough examination of the existence and validity of the arbitration agreement.
  3. The Secondary inquiry involves to arbitrability and a prima facie review of the facts including an examination of the bona fides of the assertion on arbitrability.

CONCLUSION & COMMENTS

  • The Supreme court in its series of judgements from Vidya Drolia case till the present case , seems to have been amplifying the  scope of  review at the pre-referral stage from a basic verification of the existence and validity of the arbitration agreement and arbitrability of the subject matters to further involve an examination of the bona fides of the claim.
  •  Abovementioned extensive examination is assumed to take up extensive time of the already overburdened judiciary on account of such precedents it might enhance troublesome for the courts to confine  their jurisdiction to solely examining the existence and validity of the arbitration agreement and the arbitrability of the subject matter.
  • Further in the light of the current development in N.N Global Mercantile Pvt limited vs. Indo Unique Flame the pre referral jurisdiction of the courts has also  been expanded to taking a prima facie view on the sufficiency of stamping as well parties determining to delay for prevent an arbitration may use this position to pamper to their monetary interest by lifting up diversified issues relating to the benefits of the claim at the pre referral stage itself hence the widening scope of the pre referral jurisdiction could be potentially be used in the form of dilatory tactic thereby lowering the efficiency of arbitration process.

REFERENCES

Important Cases Referred

SBP & Co. vs. Patel Engg.Ltd

National Insurance Co. Ltd. vs. Boghara Polyfab Pvt.Ltd. (2009) 1 SCC 267

Vidya Drolia and Ors, vs. Durga Trading Corporation (2021) 2 SCC 1

N.N Global Mercantile Pvt limited vs. Indo Unique Flame (2023) SCC Online SC 495

Important Statutes Referred

Section-11(6) The Arbitration and Conciliation Act 1996

Article-226  The Constitution Of India 1949

Section-14 The Indian Contact Act 1872