Author: Mahima, 5th Year student at School of Law, UPES, Dehradun.
Citation: ARB. P. 477/2020
Date of Judgment: April 8, 2021
Bench: Vibhu Bakhru
Original Copy: View
Issues in Question:
- The scope of examination at a pre-referral stage under Section 11 of the Arbitration and Conciliation Agreement?
- Whether the said dispute should be examined by the High Court or should be referred to the Arbitral Tribunal?
Background of the Case:
- SPML secured a project for ‘Installation Services for Station Piping Package for Simhadri Super Thermal Power Project Stage II at NTPC Simhadri Vishakhapatnam by furnishing Performance Bank Guarantees and Advance Bank Guarantee of an amount totalling to ₹ 14,96,89,136/-
- SPML claims that the delay in execution of the project was attributable to NTPC and on finishing the project on 18.12.2015, they received a completion certificate. SPML’s case is that even after issuance of completion certificate, NTPC failed to release the Bank Guarantees.
- NTPC informed SPML on 10.04.2019, that final payment would be released upon receipt of No Demand Certificate from the SPML and the Bank Guarantees would be released following the release of final payment. The final payment of ₹1,40,00,000/- was released in April 2019 but NTPC failed in releasing the Bank Guarantees despite repeated reminders.
- NTPC further informed SPML through an e-mail dated 14.05.2019, that the Bank Guarantees are being withheld on ground of other pending liabilities and/or arbitral disputes considering other projects at other sites between the parties. SPML responded by a letter dated 15.05.2019, that such disputes were not attributable to present payment of Bank Guarantees and raised interim claims amounting to ₹72,01,53,898/- within fifteen days from the date of receipt of the letter.
- SPML issued a notice calling upon NTPC to appoint an adjudicator within thirty days as per the Dispute Resolution Clause as mandated under Clause 6 of the General Conditions of the Contract read with Clause 3 of Special Conditions of the Contract after NTPC failed to respond to the letter sent by SPML.
- When NTPC failed to release the Bank Guarantees despite several assurances, SPML filed a writ petition where an order dated 8.07.2019, stayed the encashment of the Bank Guarantees subject to SPML. SPML issued a notice to NTPC dated 23.07.2019, to commence arbitration as NTPC failed to meet its claims as set out in its notice dated 12.06.2019. SPML nominated Justice (Retd.) Dr. Satish Chandra, a former judge of the High Court of Indore for adjudicating the disputes between the parties while requesting NTPC to appoint another arbitrator.
- NTPC responded to the above-mentioned notice by a letter dated 29.08.2019, seeking amicable settlement of dispute or constitution of an Expert Selection Council (ESC). SPML in its letter dated 07.09.2019 rejected the suggestion of NTPC as it was beyond the contractual provisions. In the letter, SPML further requested NTPC to appoint another arbitrator so that an Arbitral Tribunal may be constituted for resolving the dispute. NTPC requested SPML to resolve disputes through ESC stating that the notice to commence arbitration was untenable and if ESC failed to resolve the dispute, they will refer the case for arbitration via a letter dated 30.09.2019.
- SPML finally agreed to resolve the dispute amicably through a meeting while maintaining that Arbitration clause will be invoked in a situation where the dispute isn’t settled and the Bank Guarantees are not released within thirty days. In the meeting, NTPC proposed consulting the higher management for immediate release of Bank Guarantees only if SPML withdrew the arbitration notice. SPML reverted back on the same proposal indicating its willingness to withdraw its arbitration notice if NTPC released the Bank Guarantees by the end of the November. NTPC in return demanded a complete and unconditional acceptance from SPML to proceed further. SPML, then, informed NTPC about the losses it has incurred on account of non-release of Bank Guarantees thereby requesting NTPC to release the Bank Guarantees or appoint an Arbitrator for constitution of Arbitral Tribunal.
- Finally, SPML withdrew its arbitration notice on 21.12.2019 subject to release of Bank Guarantees by NTPC by 20.01.2020. SPML claims that during the pendency of the writ petition, NTPC proposed a settlement agreement to SPML and stated that Bank Guarantees would not be released until SPML signs the Settlement Agreement. The Settlement Agreement was duly signed after which the Bank Guarantees were released which however had expired. Consequently, the writ petition filed by SPML was also withdrawn on 21.09.2020. In a letter dated 22.07.2020, SPML stated that it signed the Settlement Agreement under duress. NTPC responded via a letter dated 22.07.2020 objecting upon monetary claim of ₹72,01,53,899 by SPML.
Contention of the Parties:
- The counsel for petitioner submitted that Arbitration Clause is undisputable as pre-arbitration steps as contemplated under GCC were taken prior to commencement of arbitration. He highlighted the petitioner’s request to appoint an adjudicator under Clause 6.1.3. of the GCC read with Clause 3 of the SCC. He further highlighted that both the parties took the first step of ‘mutual consultation’ as well.
- In addition, he stated that lack of contemplation of any recourse to conciliation defers the respondent from seeking adjudication of the disputes via Expert Settlement Council (ESC). He also stated that the ESC was not only beyond the scope of Clause 6 of the GCC but also came into existence after the award of the contract agreement.
- Regarding the Settlement Agreement which released NTPC of all its liabilities, he argued that it wasn’t valid as it was signed by the petitioner under economic coercion as it was conditional upon release of Bank Guarantees which were withheld by NTPC since several years.
- He cited Mayavati Trading Pvt Ltd v Pradyuat Deb Burman and relied upon Section 11(6A) of the Arbitration and Conciliation Act, 1996 to emphasis that this Court is entitled merely to establish prima facie satisfaction of the existence of an Arbitration Agreement.
- The counsel for the respondent submitted that the present petition was immature as the necessary pre-arbitral steps were not taken. He highlighted Section 6 of the GCC which states that the parties must reach an amicable settlement through mutual consultation, on failing which the dispute shall eb referred to the adjudicator which would be final if neither party invoke arbitration clause within 56 days of the award. He submits that even after repeated requests by the NTPC to solve the disputes mutually and to refer it to the ESC for appointment of an adjudicator, SPML chose to rather execute a Settlement Agreement. He relied on Oriental Company Insurance Ltd v M/s Narbheram Power and Steel Pvt Ltd to support the argument that construction of the Arbitration clause should be rather strict in nature.
- He further alleged that SPML chose to not initiate any further proceedings but act upon the Settlement Agreement to enjoy the release of Bank Guarantees and the claims amounting to ₹70 crores (approx.) are untenable as the same were not raised during execution of the Settlement Agreement nor there exist any valid claims against NTPC after payment has been completed.
- He further submitted that novation or suppression is beyond the jurisdiction of the Arbitrator under Section 16 of the Act when the appointment of the Arbitrator is based on an Arbitration Clause which ceases to exist along with the original contract. He explains that not only the Settlement Agreement supersedes the Contract Agreement but the contract Agreement also terminates on completion of the project and so does the Arbitration Clause. He cited Union of India v Kishorilal Gupta and Bros to support his explanation.
- The Court referred the parties for arbitration as it allowed the petition and appointed Justice Manohar Singh (former Judge of Supreme Court) as NTPC’s nominated arbitrator as NTPC did not appoint an arbitrator despite multiple requests for the same from SPML. The court instructed both the arbitrators (learned Arbitrator appointed by SPML and by this Court) to jointly appoint the Presiding Arbitrator under Clause 6.2.4 of GCC.
- Extensive study of the Contract Agreement as well as the Settlement Agreement led the Court to the conclusion that the Settlement Agreement was merely SPML’s affirmation to withdraw all its claims for deliverance of the bank guarantees withheld by NTPC. It explained that the rights and obligations of the parties would have been covered by the new contract instead of the one which was novated untenably, however, in this case the Settlement Agreement didn’t substitute the Contract Agreement. Therefore, the Court concluded that the Settlement Agreement was completely different from the Contract Agreement.
- The Court declared the contention that the present petition is pre-mature as unmerited as various letters between SPML and NTPC establish that SPML had exhausted the pre-arbitral recourses.
- The Court found indications of SPML facing financial constraints to be apparent as NTPC continues to withhold the Bank Guarantees whereas also found that no substantial reason was provided by NTPC to continue withholding the same but rather persisted release of the same if SPML withdrew the disputes.
- This case established the scope of interference in applications filed under Section 11 of the Arbitration and Conciliation Act, 1996.
- In this case, it maintained that detailed examination of disputes would prejudice either of the parties if and when referred to Arbitration and the Court must relegate the parties to resolve their disputes through arbitration until it can conclude that claimant’s objection to the settlement is frivolous in nature.
- It also maintained that in case when the Court finds out that the Arbitration Clause is non-existent, the parties would have no option except recourse to the Civil Courts and therefore, arbitration should be preferred once the existence of an Arbitration Clause is established. In addition, the question of discharge of contract via accord and satisfaction must be established independent of any detailed adjudicatory exercise.
- Emphasis was laid upon the statement of objects and reasons appended to the Arbitration and Conciliation (Amendment) Bill, 2005 which explicitly states that while adjudicating upon an application regarding the appointment of arbitrator, the High Court or the Supreme Court shall merely examine the existence of a prima facie Arbitration Agreement.