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Validity of settlement to be bona-fide as an additional ground to invoke arbitration u/S 11 of the A&C Act: Delhi High Court

In matter of appointment of an arbitrator in the failure of such appointments by the party, the Delhi High Court bench of Vibhu Bakhru J. opined that the court should also take an additional measure of scrutinizing the validity of settlement. The matter in SPML INFRA LTD v NTPC LTD [ARB. P. 477/2020] arose out of contention surrounding the apparent novation of the contract.

SPML filed the present petition under Section 11 of the Arbitration and Conciliation Act, 1996 (hereafter the ‘A&C Act’), inter alia, praying that an Arbitral Tribunal be constituted to adjudicate the disputes that have arisen between the parties in relation to the Contract Agreement dated 22.06.2009. SPML claimed that the execution of the project was hampered for reasons attributable to NTPC. Nonetheless, SPML completed the project on 18.12.2015 and accordingly, was granted a completion certificate. It is SPML’s case that even after issuance of the completion certificate; NTPC failed and neglected to release the Bank Guarantees.

NTPC contended that the present petition is premature as the petitioner has failed to take the mandatory pre-arbitral steps. In terms of Clause 6 of the GCC of the Contract Agreement, the parties must, reach an amicable settlement by mutual consultation and in case, the same is not possible, then the disputes are to be referred to an adjudicator. It was stated that NTPC on several occasions had communicated to SPML to amicably resolve the disputes and had also advised referring the dispute to the ESC wherein, an adjudicator would have been appointed
It was also submitted that the issue of novation/supersession is not a preliminary issue and is beyond the jurisdiction of the Arbitrator under Section 16 of the A&C Act as the Arbitrator under Section 16 of the A&C Act is not empowered to decide upon any issue if the appointment of the learned Arbitrator itself is on the basis of an arbitration clause which has become void along with the original contract. The Settlement Agreement entered into between the parties supersedes the Contract Agreement, which stood terminated on completion of the project, and since, the Contract Agreement has now lost its validity.

The principal controversy to be addressed before the Court related to the scope of examination under Section 11 of the A&C Act at a pre-referral stage. According to NTPC, the Settlement Agreement entered into by the parties novated the Contract Agreement. With the said novation, the Arbitration Clause contained in the Contract Agreement perished and since the Settlement Agreement does not include an Arbitration Clause, the parties cannot be referred to arbitration.

The court observed that “[..] since an adjudicator was not appointed, SPML invoked the Arbitration Clause and by its letter dated 23.07.2019, it nominated its arbitrator and called upon NTPC to nominate an arbitrator so that an Arbitral Tribunal could be constituted.” It is apparent from the above that SPML had indicated that it was facing financial constraints on account of NTPC withholding the Bank Guarantees. NTPC on the other hand does not appear to have provided any substantial grounds for withholding the same. It, however, continued to persist with SPML that it would release the Bank Guarantees if SPML withdraws the disputes.

The court rendered the judgment that “The contentions that the reference to arbitration is premature as the parties have not exhausted the processes under the dispute resolution mechanism inasmuch as, the parties were required to first attempt to resolve the disputes amicably is unmerited. If they were unsuccessful in doing so, they were to refer it to an Adjudicator. And, if the disputes still remained unresolved, the same could be referred to arbitration.

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