Court Can Within The Limited Scope Of Judicial Scrutiny Under Section 11 Of The A&C Act, Examine If Claims Are Frivolous Or Meritless: Bombay High Court

The bench of Justice Manish Pitale refused to appoint an arbitrator when the claims sought to be arbitrated by the petitioner were pre-mature as per the terms of the agreement.

Facts

The parties entered into a Memorandum of Understanding (MoU) dated 30.03.2021. In terms of the MoU, the petitioner was engaged by the respondent to provide financial services to it. The petitioner was to prepare a term sheet cum investment memorandum. Pursuant thereto, it would receive an amount of Rs. 10,00,000/- as fee. Moreover, it would receive 2.5% on the date on which the first disbursement of financial assistance is received by the respondent, in pursuance of the services provided by the applicant. The MoU also provided for resolution of disputes through arbitration.

The petitioner raised two invoices on the respondent for the payment of Rs. 10,00,000/- for the preparation of the investment memorandum cum term sheet and Rs. 17,90,00,000/- as 2.5% share of the disbursement received by the respondent pursuant to the financial services provided by it.

The payment against these invoices was declined which led to a dispute between the parties. The petitioner invoked the arbitration and issued a notice of arbitration and requested the respondent to mutually appoint the named arbitrator but on failure of the parties to mutually appoint the arbitrator, the petitioner filed an application under Section 11 of the Act.

Contention of the Parties

The respondent objected to the appointment of the arbitrator on the following grounds:

• The claims raised by the petitioner are frivolous and unfounded in terms of the agreement.
• The payment to the petitioner in terms of the agreement was contingent upon the preparation of a term sheet cum investment memorandum, however, no such memorandum has been prepared and sent by it to the respondent. Further, the amount of Rs. 17,90,00,000/- as mentioned in the second invoice is dependent upon the respondent receiving a disbursement, however, no such disbursement has taken place.

The petitioner raised by following counter-arguments in support of the petition:

• The Court exercising power under Section 11 of the Act is to make a prima facie examination about the existence of the arbitration agreement and it is beyond the scope of the section for the court to go into the merits of the claims.
• The existence of the arbitration agreement has not been denied by the respondent; therefore, the dispute must be referred to arbitration.

Analysis by the Court

The instructed the counsel for the petitioner to produce on record the investment memorandum it allegedly prepared for the respondent, however, it failed to bring it on record for the Court’s perusal.

The Court observed that there is nothing on record to even faintly suggest that the applicant ever prepared such investment memorandum and / or communicated the same to the respondent. Thus, the event as per the MoU, which would lead to a claim of fee of Rs.10,00,000/- being payable to the applicant, on the face of it, cannot be said to have occurred

The Court also held that the amount of Rs. 17,90,00,000/- claimed by the petitioner was to be paid to the petitioner as 2.5% of the disbursement the respondent received pursuant to the services provided it, however, there was nothing on record to show that the respondent ever received any such disbursement, the petitioner cannot claim such an amount which is contingent upon the happening of an event that has not occurred.

The Court observed that despite the limited scope of judicial scrutiny under Section 11 of the A&C Act, the Court would refuse to appoint the arbitrator when on a prima facie scrutiny of the material on record, it can come to a conclusion that claims sought to be arbitrated are frivolous and meritless.

Accordingly, the Court dismissed the arbitration petition by observing that the claims raised by the petitioner are frivolous and meritless.

Case Title: 22Light v. OESPL Pvt Ltd, Commercial Arbitration Application No. 215 of 2021

Date: 22.08.2023

Counsel for the Petitioner: Mr. A. S. Pal a/w. Mr. Siddharth Mehta and Mr. Siddhartha Puthoor i/b. Mehta & Padamsy

Counsel for the Respondent: Mr. Anurag Bhatt a/w. Mr. Lokesh Pathak i/b. Mr. Abhiishek Bhaduri

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