Beyond The Existence Of An Arbitration Agreement: Supreme Court Clears The Position

Overturning the finding rendered by the Delhi High Court, the Supreme Court in Indian Oil Corporation Limited v NCC Limited¹ inter alia held that a Court when deciding an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) is not restricted to ascertaining only the existence and validity of an arbitration agreement. Elaborating further, the Court observed that, at the Section 11 stage, there is no bar on the courts from deciding the question of jurisdiction and non-arbitrability of the dispute, if the facts of the dispute are 'very clear and glaring' and if the dispute falls within the 'excepted clause' of the agreement binding the disputing parties.

Brief Facts:

Indian Oil Corporation Limited (IOCL or Appellant), as owner, entered into 5 contracts with NCC Limited (NCCL or Respondent), as contractor, in respect of certain civil and piping work for one of IOCL's refinery projects. Due to delay in completion, NCCL made a request for extension of time (EOT). During the pendency of this extension, NCCL submitted its final bill while making a specific reference to Notified Claims (for additional costs incurred) therein. NCCL, thereafter, agreed to withdraw its Notified Claims from the final bill if both its EOT and price discount requests were considered favourably by IOCL. These requests were partially acceded to and IOCL released the final bill payment in favour of NCCL, while treating the Notified Claims as fully withdrawn. Aggrieved by this partial allowance, NCCL protested against the same as IOCL had made the final bill payment without factoring NCCL's conditional requests in its entirety. NCCL further alleged that its letter for withdrawal of claims was made under duress and coercion, and that the same was a conditional offer and not an acceptance letter for withdrawal of its Notified Claims. Replying to these allegations, IOCL stated that none of the claims raised by NCCL in the final bill were Notified Claims.

In view of the aforesaid, NCCL invoked arbitration under the terms of the contracts, pursuant to which IOCL referred the matters to its General Manager to decide the arbitrability of NCCL's claims which ultimately came to be dismissed as non-arbitrable under all 5 contracts.

It is imperative to mention here that the contracting parties had specifically excluded the following disputes from the scope of the arbitration agreement:

1. Scope or existence of the arbitration agreement
2. Whether the Claim sought to be referred to arbitration is a Notified Claim
3. Whether the Notified Claim is included in NCCL's final bill raised
4. Whether NCCL has opted for alternative dispute resolution with respect to the Notified Claims included in NCCL's final bill

Being aggrieved, NCCL approached the Delhi High Court under Section 11(6) of the Act seeking appointment of a sole arbitrator, which came to be allowed. Challenging this, IOCL preferred 5 civil appeals before the Supreme Court.

Appellant's Submissions:

The gist of the submissions made by the Appellant was that in contracts where the parties agree to an arbitration clause but also agree that only certain specified disputes arising out of the agreement would be arbitrable, this would mean that no arbitration clause exists in respect of the remaining disputes and such disputes would be termed as 'excepted disputes'. Therefore, such an arbitration clause is a restricted arbitration clause and the same would not lead to the invocation of Section 11 (6-A) of the Act and the question of referring such excepted disputes to arbitration does not arise.

Respondent's Submissions:

The Respondent's key submission was that the Court cannot look into the conclusion of accord and satisfaction between the parties at the referral stage. Further, the Court's role, in view of S.11 (6-A), is limited to the examination of the existence of an arbitration agreement. In view of the same, the Court cannot look into what an excepted claim is or not.

Findings & Analysis of the Court:

The Supreme Court inter alia held and observed as follows:

1. The parties to a contract are free to agree on the applicability of (a) the proper law of contract; (b) the proper law of the arbitration agreement; and (c) the proper law of conduct of the arbitration. Further, the parties are also at liberty to exclude certain matters from the scope of arbitration.
2. The Court was not in consonance with the judgment of the Delhi High Court as it was of the opinion that the High Court had misinterpreted the arbitration clause of the agreement and had erred in holding that the Notified Claims would fall within the ambit of the arbitration agreement, despite the same being specifically excluded and falling under the term 'excepted matters'.
3. In doing so, it further held, that the High Court erred in referring the dispute to arbitration and appointing a sole arbitrator to adjudicate on the dispute with respect to the claims which were held to be not Notified Claims by the General Manager.
4. Furthermore, the Supreme Court was not agreeable to the Respondent's submission that a Section 11 Court cannot look into the conclusion of 'accord and satisfaction' of the claims and held that at the referral stage, the Court may prima facie consider this issue.
5. As state above, it was held that the question of jurisdiction and arbitrability can be decided by the Court at the referral stage and the Court is not restricted to ascertaining only the existence and the validity of an arbitration agreement between the disputing parties.

Comments:  

In furtherance to the Vidya Drolia² judgment, the Supreme Court recently in DLF Home Developers Limited v Rajapura Homes Private Limited & Anr³observed that the jurisdiction of the Court at the referral stage is to primarily discern the existence of a written agreement and further detect whether the aggrieved party has established a prima facie arbitrable case. However, the same does not bar the Courts from looking beyond the bare existence of the arbitration agreement. The present judgment brings more clarification on the powers and the scope of a Section 11 Court, thereby ensuring that disputes are not referred to arbitration without actually conducting a judicial enquiry where the subject matter of a particular dispute is ex facie non-arbitrable. In doing so, genuine litigants would be precluded from engaging in long drawn arbitral proceedings.

Footnotes

1 Civil Appeal Nos. 341 to 345 of 2022

2 Vidya Drolia  v Durga Trading Corporation, (2021) 2 SCC 1

3 2021 SCC OnLine SC 781

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