POWER OF REFERRAL COURT IS LIMITED UNDER SECTION 11 OF ARBITRAITON AND CONCILIATION ACT, 1996

[Mr. M. GOVINDARAJAN]

In GOQII TECHNOLOGIES PRIVATE LIMITED VERSUS SOKRATI TECHNOLOGIES PRIVATE LIMITED - 2024 (11) TMI 392 - SUPREME COURT (LB), the appellant, in this case, is providing life style consultancy services entered into an agreement with the respondent and its subsidiary to manage its digital advertising campaign. The said agreement was extended for 3 years on 29.04.2024 with certain amendments. The appellant paid Rs.5.53 crores to the respondent. In the meanwhile the appellant found that Economic Offences Wing, Mumbai filed a complaint against the respondent alleging serious irregularities and malpractices.

The appellant engaged an auditor in November, 2022 to prepare a report on the activities of the respondent for the period from April 2022 to December 2022. The Auditor report conveyed that there was a over charge of Rs.4.49 crores by the respondent to the appellant. The report recommended for further detailed investigation across all the media campaigns.

In the mean while the respondent served a demand notice on the appellant on 22.02.2023 under Section 8 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) seeking for the payment of Rs.6.26 crores towards the outstanding invoices. The appellant replied to the demand notice and objected the same showing the audit report and claimed Rs.5.33 crore with 18% interest per annum. The appellant claimed Rs.6 crores, additionally, as damages. The appellant further invoked arbitration under Clause 18.12 of the agreement.

Since the respondent did not respond to the invocation of arbitration by the appellant, the appellant filed a Commercial Arbitration Petition before the High Court, seeking an appointment of an arbitrator. While this petition is pending before the High Court, the respondent filed an application before the National Company Law Tribunal under Section 9 of the Code for initiating corporate insolvency resolution process against the appellant.

The High Court dismissed the petition of the appellant for the appointment of an arbitration. The High Court found that independent audit report revealed significant concerns regarding the performance of the digital marketing campaigns executed by the respondent. The High Court was of the view that although the report highlighted poor returns on investment and inconsistent metrics, yet it did not support the assertions made by the appellant regarding fraudulent practices of the respondent. The appellant failed to demonstrate any substantial discrepancies in the report that would justify withholding payment for the invoices raised.  While further investigation was suggested in the audit report, the appellant’s attempt to invoke arbitration based on non-existent disputes constituted a manifestly dishonest claim and therefore dismissed the application.

Since the High Court rejected the request of the appellant to appoint an arbitrator, the appellant filed the present appeal before the Supreme Court. The appellant submitted the following before the Supreme Court-

• The scope of interference by a referral court acting in exercise of its jurisdiction under Section 11 of the Act, 1996 is limited.
• The court is required to conduct a preliminary inquiry for the purpose of ascertaining whether a prima facie case exists for referring the dispute to arbitration. Contrary to this narrow scope.
• The High Court proceeded to erroneously undertake a full review of the contested facts, thereby exceeding in its jurisdiction.
• The appellant had no prior opportunity to raise the disputes, as they only came to light upon receiving the Audit Report in February 2023.
• Even otherwise, it had sent multiple emails to the respondent raising various objections regarding the invoices issued to the appellant prior to the issuance of the Audit Report.

The respondents submitted the following before the Supreme Court-

• The mere inclusion of an arbitration clause in a contract or agreement does not render a matter automatically arbitrable and a prima facie case establishing the existence of a dispute must first be made.
• The dispute raised in the present petition is nothing more than an afterthought.
• the appellant is not entitled to any damages or refund for the alleged overcharges on the services rendered by the respondent as the appellant had previously not raised any concerns or identified deficiencies while utilizing these services.
• The petition of the appellant is an attempt to create duplicative legal proceedings aimed at evading liability for admitted dues and disrupting the CIRP process.

The Supreme Court considered the submissions of the appellant and the respondent. The question that falls for the consideration of the Supreme Court is as to whether the High Court committed any error in dismissing the appellant’s application under Section 11 of the Act, 1996.

The Supreme Court relied on its own judgments IN RE. : INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT, 1996 AND THE INDIAN STAMP ACT, 1899 - 2023 (12) TMI 897 - SUPREME COURT (LB) in view of this judgment, the Supreme Court was of the view that it is clear that the scope of enquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement, and nothing else.

The Supreme Court observed that the scope of inquiry under Section 11 of the Act, 1996 is limited to ascertaining the prima facie existence of an arbitration agreement. The High Court erroneously proceeded to assess the auditor’s report in detail and dismissed the arbitration application. the judicial scrutiny at the stage of Section 11 solely to the prima facie determination of the existence of an arbitration agreement.

The Supreme Court clarified that the limited jurisdiction of the referral Courts under Section 11 must not be misused by parties in order to force other parties to the arbitration agreement to participate in a time-consuming and costly arbitration process. The Supreme Court observed that the respondent did not dispute the existence of agreement under clause 18.12. The question whether there exists a valid dispute to be referred to arbitration can be addressed by the Arbitral Tribunal as a preliminary issue. The Supreme Court allowed the appeal filed by the appellant by setting aside the impugned order of the High Court. The Supreme Court appointed the Chief Justice of Punjab and Haryana High Court as the Sole arbitrator to adjudicate the disputes between the parties.