Courts Can Refuse To Appoint Arbitrator In Rare Cases Where No Arbitration Agreement Exists: Supreme Court

The Supreme Court on Thursday held that courts may refuse to refer parties to arbitration at the Section 11 stage in the rarest of rare cases where, even on a prima facie view, no arbitration agreement exists, carving out a narrow exception to the principle of minimal judicial interference.

Clarifying that judicial scrutiny at the stage of appointing arbitrators is otherwise limited to examining the prima facie existence of an arbitration agreement and that courts should follow the principle of “when in doubt, do refer”, a bench of Justices J.K. Maheshwari and Atul S. Chandurkar observed:

“It goes without saying that the scope of inquiry at the stage of Section 11 is extremely limited and only pertains to an examination about prima facie existence of an arbitration agreement. Judicial non-interference in the arbitration process is the sacrosanct principle which guides alternative dispute resolution and Courts must be highly circumspect in interfering at the referral stage, especially since there is no appeal available in the 1996 Act against an order under Section 11. The Arbitral Tribunal, in exercise of its jurisdiction under Section 16 must be left to decide on its jurisdiction. The Courts should follow the principle of 'When in doubt, do refer' and lean towards referring matters to arbitration when the arbitration agreement is prima facie existent.”

The court clarified that this principle applies only where an arbitration agreement is prima facie established, and that in such rare situations where no such agreement exists even on a prima facie view, courts are justified in refusing reference. The bench said:

“However, it is only in the rarest of rare cases where even on a prima facie view, without going into disputed facts between the parties, there appears to be no existence of arbitration agreement between the parties, the Court can reject the application for appointment of an arbitrator and reference of the parties to arbitration.”

The dispute arose from a tender dated August 11, 2021 issued by Maharashtra State Electricity Distribution Company Limited for civil works valued at over Rs. 17 crore. The respondent's bid was accepted through a Letter of Intent dated November 16, 2022, following which bank guarantees were furnished. However, no formal work order was issued and no agreement was executed.

The respondent later terminated the process alleging failure to hand over the work site and invoked arbitration on August 30, 2024, seeking compensation.

Maharashtra State Electricity Distribution Company Limited opposed the move, contending that no concluded contract or arbitration agreement existed. Despite this, the Bombay High Court on October 1, 2025 appointed a sole arbitrator.

The Supreme Court found that the Letter of Intent was merely a precursor to a contract and did not create a binding legal relationship. It further held that a general reference to tender documents was insufficient to incorporate an arbitration clause. The court said:

“In our view, this is a case of 'reference' and not 'incorporation'. There is no mention of any arbitration or dispute resolution clause in the LOI itself, neither does it purport specific incorporation thereof from the tender documents. As such, the arbitration clause contained in the Tender documents could not be said to have been incorporated in the LOI to evince the existence of an arbitration agreement between the parties on its conjoint reading with the Tender documents.”

Holding that this was one of the rarest of rare cases where no arbitration agreement existed even on a prima facie view, the court set aside the High Court's order appointing the arbitrator.