Referral Courts At Post-Award Stage Must Protect Parties From Being Forced To Arbitrate Non-Arbitrable Claims: Delhi High Court

The Delhi High Court bench of Justice Subramonium Prasad, while refusing to appoint an arbitrator in a Section 11 petition, has held that the referral court in a post-award stage must protect the parties from being forced to arbitrate when, after prime facie scrutiny of the facts the claims are found to be non-arbitrable. The court applied the 'eye of the needle' test, which allows the referral court to reject arbitration in exceptional circumstances where the claims are deadwood. Facts: The respondent invited bids regarding the execution of the Hydro Electric Project on the Chenab River at Kishtwar, Jammu, and Kashmir, and the petitioner submitted its bid. In the second phase, the work was bifurcated into Packages 1 and 2, and the petitioner was awarded both packages. The contract was entered into between the parties on 09.04.1997, and the work was stipulated to be completed within 33 months. However, the project was extended till 2007 after the extension was granted to complete the work, and the respondent issued a certificate of completion. Bills for the two packages were raised by the petitioner, including additional costs incurred due to overstaying at the site. These additional costs amounted to ₹360.56 crore, and this claim was rejected by the respondent. A dispute arose between the parties, the arbitration clause in the contract was invoked, and a three-member arbitral tribunal was constituted. In the majority award, an amount of ₹60 cr. was awarded to the petitioner on the principle of good conscience and reasonable and proper estimate despite no evidence being led by the petitioner to substantiate the claim. Subsequently, the award was challenged by both parties, and was set aside by the single judge. Subsequently, the petitioner approached this court to refer the dispute to arbitration. Submissions: The petitioner made the following submissions: The award did not adjudicate the dispute on merits, so an arbitral tribunal has to be appointed to adjudicate the dispute between the parties. Furthermore, Section 43(4) of the A&C Act provides that where the court sets aside an award, a fresh proceeding can be initiated within the timeline prescribed under the said section. When a court exercises its power under Section 34, it cannot correct the arbitrator's error and can only quash the award, leaving the parties free to begin arbitration proceedings again. Furthermore, when a court sets aside a majority award, the underlying dispute must be decided afresh in an appropriate proceeding. Claim whether barred by res judicata should not be considered by a referral court, and such issue will have to be examined by the tribunal. The respondent made the following submissions: Questions on adjudication for the additional cost have already been decided by the tribunal. It has held that there was no material for the petitioner to substantiate their claims. The amount of ₹60 cr awarded by the tribunal was set aside by the learned single judge. Therefore, there is nothing left for further adjudication. The referral court has the jurisdiction to prima facie scrutinize the claim to ascertain whether the claim is a dead claim, and thereby not refer the dispute to arbitration. Analysis of the Court: The bench observed that post Vidya Drolia v. Durga Trading Corporation (2021) and SBI General Insurance Co Ltd. v. Krish Spinning (2024) the scope of referral courts is primarily restricted to ascertaining whether a valid arbitration agreement exists between the parties. The arbitral tribunal is considered to be the primary authority to adjudicate upon the arbitrability of disputes. Nonetheless, the referral court can exercise its limited jurisdiction not to refer ex-facie frivolous and non-arbitrable disputes to arbitration. In the majority award, it was held that determining the additional cost is impossible since it was not claimed during the contract's implementation. It is not possible to estimate it simultaneously with other periodic expenses. The claim was premised on the estimates prepared and approved by auditors, and the certificates were issued based on the claimant's account from 2001 to 2007, but it had not been proved in accordance with the law. Due to imperfect evidence being led by the petitioner, the tribunal, after scrutinizing the contentions, concluded that it couldn't ascertain the amount payable to the claimant separately. The tribunal has adjudicated the dispute once, and referring the same issue back to the tribunal would amount to re-agitating the same issue. The sole reason for setting aside the award by the single judge was that there was a conflict in the impugned award. On the one hand, the tribunal observed that no material was placed on record to award the compensation, but on the other hand, it awarded a sum of ₹60 cr. The tribunal's finding, i.e. no evidence to substantiate...

Referral Courts At Post-Award Stage Must Protect Parties From Being Forced To Arbitrate Non-Arbitrable Claims: Delhi High Court

Mohd Talha Hasan

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