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Courts are not expected to act mechanically while exercising jurisdiction U/S 11(6) of Arbitration Act: Supreme Court

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Arbitration Law Insider

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Published on: 18 April 2023 at 13:32 IST

The Supreme Court has ruled that when a court exercises jurisdiction under Section 11(6) of the Arbitration and Conciliation Act 1996, it should not act mechanically to deliver a purported dispute raised at the doors of a chosen arbitrator. The court must conduct a limited scrutiny through the “eye of the needle,” which is necessary to prevent the undermining of the effectiveness of both arbitration and the court. Section 11(6) confers jurisdiction on the Supreme Court or a High Court in case of non-compliance of the procedure for appointment of an arbitrator.

The court was hearing an appeal against a decision of the Delhi High Court, which had allowed the respondent’s application under Section 11(6) for the constitution of an arbitral tribunal after the parties had entered into a settlement agreement.

The appellant entered into a contract with the respondent for installation services.

The respondent furnished bank guarantees of ₹14,96,89,136, and after the project was completed, the appellant issued a completion certificate on March 27, 2019. The final payment under the contract would be released upon the receipt of a no-demand certificate from the respondent. After the no-demand certificate was issued, the appellant released the final payment amounting to ₹1,40,00,000 in April 2019. However, the bank guarantees were withheld on account of pending liabilities and disputes between the parties.

The respondent raised a demand of ₹72,01,53,899 from the appellant as liabilities recoverable for actions attributable to the appellant under this very contract. With no response from the appellant, the respondent preferred a petition before the High Court seeking the release of bank guarantees from the appellant. The High Court directed the appellant not to encash the bank guarantees and further directed the respondent to keep them alive.

Later, a settlement agreement was reached by the parties, with the appellant agreeing to release the bank guarantees, and the respondent agreeing to withdraw the plea from the High Court. However, the respondent repudiated the settlement agreement and filed an application before the High Court under Section 11(6) of the Act. In the application, the appellant alleged that the dispute between the parties was settled under the settlement agreement, and thus, there was a discharge of the contract by accord and satisfaction.

The Supreme Court analyzed the case and noted that the entire law concerning pre-referral jurisdiction of the court under Section 11(6) is covered by the decision in Vidya Drolia and Ors. v. Durga Trading Corporation. It held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the 1996 Act is identical but extremely limited and restricted. The arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability.

In the instant case, the Court found that the respondent’s allegations of coercion and economic duress are not bona fide since there were no pending claims between the parties for submission to arbitration. Moreover, the Court was of the view that the letter of repudiation on the part of the respondent was issued only to wriggle out of the terms of the settlement agreement. The Court held that the High Court has committed an error in allowing the application under Section 11(6) of the Act.

Read Judgment