The dispute arose between Goqii Technologies Private Limited ("the appellant") and Sokrati Technologies Private Limited ("the respondent") under the terms of a Master Services Agreement ("MSA") governing digital advertising services. The appellant, a technology-based wellness company, had raised concerns over the quality and cost of services provided by the respondent, following a report by an independent auditor. The audit suggested that the appellant had been overcharged and that significant discrepancies existed in the digital advertising campaigns managed by the respondent.

In response to these allegations, the appellant invoked the arbitration clause (Clause 18.12) in the MSA, seeking the appointment of a sole arbitrator to resolve the disputes. However, the respondent did not comply with the arbitration notice, prompting the appellant to approach the High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator.

The High Court, in its judgment dated 30 April 2024, dismissed the appellant's application for the appointment of an arbitrator, concluding that the claim lacked merit and substance. The court noted that while the audit report highlighted certain concerns about the performance of the respondent’s services, it did not support the appellant’s allegations of fraudulent practices. The High Court further found that the appellant's attempt to resist payment for the outstanding invoices based on the audit report was a “manifestly dishonest claim” designed to avoid liability.

The appellant appealed the High Court's decision, arguing that the scope of judicial review at the stage of appointing an arbitrator under Section 11 is limited to determining the prima facie existence of an arbitration agreement and not the merits of the dispute. The appellant contended that the High Court had wrongly ventured into a detailed examination of the facts and the auditor’s report, which went beyond the narrow inquiry permitted under Section 11.

On the other hand, the respondent argued that the court must first ascertain whether a genuine dispute exists before referring the matter to arbitration. They emphasized that the arbitration clause does not automatically compel arbitration in every case, particularly when the dispute is seen as frivolous or based on dishonest claims.

The Supreme Court’s judgment emphasized the narrow scope of judicial intervention in arbitration proceedings. Referring to its earlier decisions, the Court reaffirmed that the role of the referral court under Section 11 is limited to conducting a preliminary examination to determine the existence of an arbitration agreement. The Court noted that the referral court should not delve into the merits of the dispute at this stage.

In its ruling, the Supreme Court pointed out that the High Court had exceeded its jurisdiction by engaging in a detailed analysis of the audit report and dismissing the arbitration application based on the merits of the dispute. The Court observed that the limited inquiry at this stage should be confined to determining whether a prima facie case for referring the dispute to arbitration exists, and not to resolving factual issues or making judgments on the honesty of claims.

The Court further observed that any questions regarding the alleged dishonesty of the appellant’s claim, or the merits of the dispute, could be more appropriately dealt with by the arbitrator once appointed. The arbitrator would have access to all relevant evidence and pleadings, which would allow for a more comprehensive examination of the issues.

The Supreme Court's decision in this case underscores the importance of maintaining the limited scope of judicial review in the appointment of arbitrators. By setting aside the High Court's order, the Court has reaffirmed that the primary role of the referral court is not to adjudicate the merits of a dispute, but to ensure that a valid arbitration agreement exists and that there is a prima facie case for arbitration.

This judgment clarifies that courts should avoid getting entangled in the substantive issues of a case at the referral stage. If a party attempts to raise a dispute that is plainly frivolous or non-existent, the court can refuse to appoint an arbitrator, but it must not engage in detailed fact-finding. Such matters are best left to the arbitrator, who is equipped to handle them with the benefit of complete information and evidence.

The Court’s ruling also sends a clear message to parties that arbitration should not be misused as a tactic to delay proceedings or avoid liability. If it is determined that one party is attempting to bring a claim with the intent to create unnecessary disputes, the arbitrator may impose costs on that party to compensate the other party for the inconvenience caused.

Ultimately, this decision highlights the balance between the autonomy of arbitration and the responsibility of courts to prevent the abuse of legal processes. The Court’s intervention in this case was crucial to ensure that the arbitration process remains a fair and efficient means of dispute resolution, without being unduly hindered by unnecessary judicial interference.

Limited Scope of Judicial Review: At the stage of appointing an arbitrator under Section 11, the court’s role is limited to determining the prima facie existence of an arbitration agreement, not to assess the merits of the dispute.

Examination of Claims: Courts should not engage in a detailed review of factual issues or the merits of a claim at the referral stage. Such matters are to be addressed by the arbitrator.

Prevention of Frivolous Claims: Courts must be vigilant against parties using arbitration as a means to delay or avoid legitimate claims. However, such issues should be addressed by the arbitrator after appointment, not at the referral stage.

Role of the Arbitrator: The arbitrator has the benefit of reviewing all relevant evidence and pleadings, making them the appropriate authority to resolve complex factual issues or allegations of dishonesty in claims.

This judgment clarifies the threshold for judicial intervention in arbitration and underscores the need for courts to respect the autonomy of the arbitration process.