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Beyond The Existence Of An Arbitration Agreement: Supreme Court Clears The Position – Arbitration & Dispute Resolution



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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NCCL, while treating the Notified Claims as fully withdrawn.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 &
Anr
3observed 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

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com

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