NTP Ltd. (NTP) and SPM Infra Ltd. (SPM) entered into a contract for certain project works (Agreement). In terms of the Agreement, SPM furnished a performance bank guarantee and advanced bank guarantee for a cumulative am

The facts of the given situation are similar to the case of NTPC Ltd. v. SPML Infra Ltd. (Supreme Court of India Citation: 2023 (SC) In this case, the Hon'ble Court has laid down that the pre-referral jurisdiction of the courts under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the Act) is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant's privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute. In the above matter, the Supreme Court, in its ruling, extensively examined the legal framework governing pre-referral jurisdiction, both before and after the 2015 Amendment. The Supreme Court classified pre-referral stage cases into three distinct categories: Cases requiring the Court's direct determination on aspects such as assessing the existence and validity of the arbitration agreement; Cases exclusively under the jurisdiction of the arbitral tribunal; Cases where the court may elect to decide, particularly those involving the determination of whether the parties had finalised the contract or transaction by mutually satisfying their rights and obligations or by making the final payment. This approach is commonly referred to as the "accord and satisfaction approach". 2015 amendment of the Arbitration Act In response to the recommendations from the 256th Law Commission Report, the 2015 Amendment introduced Section 11 (6A), aiming to limit the Courts' involvement at the pre-referral stage solely to the determination of the arbitration agreement's existence, "nothing more, nothing less". However, in certain cases, the Courts continued to apply the pre-2015 amendment "accord and satisfaction" approach. Notably, in Vidya Drolia v. Durga Trading Corporation the Supreme Court restricted the scope of pre-referral jurisdiction under Section 11(6A) to encompass a prima facie examination of (i) the existence and validity of the arbitration agreement, and (ii) the arbitrability of the dispute's subject matter. Drawing from this discussion on jurisprudence, the Court introduced an "eye of the needle" approach, involving a two-fold inquiry: The primary inquiry scrutinises the existence and validity of the arbitration agreement thoroughly. The secondary inquiry, related to arbitrability, includes a prima facie review of the facts, including an assessment of the genuineness of the assertion regarding arbitrability. Based on the prima facie examination of the facts, the Court deemed SPML's claims to be an "afterthought," and the allegations of economic duress and coercion were found to lack genuineness. Consequently, the Court dismissed the application, characterising SPML's claims and allegations as "patently frivolous and untenable" and "obviously devoid of merit and made in bad faith." In reaching this decision, the Court emphasised that supervisory courts should not act mechanically but have a "duty" to ensure that parties are not compelled to arbitrate disputes that are "demonstrably non-arbitrable." Neglecting this duty would undermine the effectiveness of the arbitration process.