Supreme Court Clarifies Enforceability of Arbitration Agreements in Unstamped Contracts: NN Global Mercantile vs. Indo Unique Flame Ltd. (2021)

Date of the Judgment: January 11, 2021
Citation: (2021) INSC 19
Judges: Dr. Dhananjaya Y Chandrachud, J., Indu Malhotra, J., and Indira Banerjee, J. (authored by Indu Malhotra, J.)
Can an arbitration agreement within an unstamped contract be enforced? The Supreme Court of India addressed this critical question in a recent judgment, clarifying the relationship between arbitration agreements and the underlying contracts, especially concerning stamp duty requirements. The Court examined whether an arbitration agreement is invalid if the main contract is not stamped as per the Stamp Act and whether allegations of fraudulent invocation of bank guarantees are arbitrable. This judgment provides significant clarity on the separability of arbitration agreements and their enforceability.

Case Background

The case involves a dispute between M/s. N.N. Global Mercantile Pvt. Ltd. (Global Mercantile) and M/s. Indo Unique Flame Ltd. (Indo Unique). Indo Unique was awarded a work order by Karnataka Power Corporation Ltd. (KPCL) for coal beneficiation. Subsequently, Indo Unique subcontracted a part of the work to Global Mercantile for coal transportation through a Work Order dated September 28, 2015.

As per the Work Order, Global Mercantile provided a bank guarantee of ₹3,36,00,000 in favor of Indo Unique’s banker, State Bank of India (SBI). Disputes arose between Indo Unique and KPCL, leading KPCL to invoke the bank guarantees provided by Indo Unique. Consequently, Indo Unique invoked the bank guarantee furnished by Global Mercantile.

Global Mercantile filed a suit in the Commercial Court, Nagpur, seeking a declaration that Indo Unique was not entitled to encash the bank guarantee, alleging that the Work Order had not been acted upon and the invocation was fraudulent. Indo Unique then filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the dispute to arbitration, based on the arbitration clause in the Work Order.

Timeline

Course of Proceedings

The Commercial Court rejected Indo Unique’s application under Section 8, stating that the arbitration clause in the Work Order did not cover the Bank Guarantee, which was an independent contract. The court also noted that no work had been performed under the Work Order.

Indo Unique then filed a Civil Revision Petition in the Bombay High Court, which was later withdrawn with liberty to file a writ petition. The High Court, in its judgment dated September 30, 2020, allowed the writ petition, holding that the arbitration agreement was valid and the allegations of fraud did not warrant the rejection of the arbitration application. The High Court also stated that the issue of the Work Order being unstamped could be raised before the arbitral tribunal.

Global Mercantile, aggrieved by the High Court’s decision, filed a Special Leave Petition before the Supreme Court.

Legal Framework

The Supreme Court examined the following key legal provisions:

• Section 8 of the Arbitration and Conciliation Act, 1996: This section deals with the power to refer parties to arbitration if there is an arbitration agreement. The Court noted that the judicial authority shall refer the parties to arbitration unless it finds that prima facie no valid agreement exists.
• Section 16 of the Arbitration and Conciliation Act, 1996: This section recognizes the principle of separability of the arbitration agreement from the underlying contract. It also empowers the arbitral tribunal to rule on its own jurisdiction.
• Section 34 of the Maharashtra Stamp Act, 1958: This section states that an instrument chargeable with duty cannot be admitted in evidence or acted upon unless it is duly stamped. It also provides for the payment of duty and penalty to make the instrument admissible.
• Section 33 of the Maharashtra Stamp Act, 1958: This section casts a statutory obligation on every person empowered by law, or holding a public office, or a person who by consent of parties is empowered to receive evidence, to examine the instrument presented before him, and ascertain whether the instrument is duly stamped.
• Section 37 of the Arbitration and Conciliation Act, 1996: This section provides for appeals against orders refusing to refer parties to arbitration.

Arguments

Global Mercantile’s Submissions:

• The arbitration agreement was not enforceable because the Work Order was unstamped, making it inadmissible under Section 34 of the Maharashtra Stamp Act, 1958.
• The arbitration clause in the unstamped agreement could not be enforced, as it had no legal existence.
• The invocation of the bank guarantee was fraudulent because the Work Order was not acted upon, and no payments were made.
• Relied on the judgment in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited, stating that an arbitration clause in an agreement would not exist when it is not enforceable by law.

Indo Unique’s Submissions:

• The Work Order, though unstamped, was enforceable after payment of the required stamp duty and penalty.
• Non-payment of stamp duty was a curable defect and did not render the agreement unenforceable.
• The dispute was arbitrable, and the allegations of fraud were not complex enough to warrant a civil suit.

Innovativeness of the Argument: Global Mercantile’s argument innovatively combined the principle of separability of arbitration agreements with the statutory requirements of the Stamp Act, arguing that the unenforceability of the main contract due to lack of stamping should render the arbitration clause unenforceable as well.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether an arbitration agreement would be enforceable and acted upon, even if the Work Order dated 28.09.2015 is unstamped and un-enforceable under the Stamp Act?
2. Whether allegations of the fraudulent invocation of the bank guarantee are an arbitrable dispute?
3. Whether a Writ Petition under Articles 226 and 227 of the Constitution would be maintainable to challenge an Order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases

• Heyman v. Darwins Ltd [1942] AC 356 (House of Lords): Expounded the doctrine of separability of the arbitration agreement. The House of Lords held that an arbitration clause is a separate contract which survives the termination of the main contract.
• Bremer Vulkan Schiffbau und Maschinefabrik v. South India Shipping Corporation [1981] AC 909 (House of Lords): Affirmed the rule that the arbitration clause constitutes a self-contained contract collateral to the main agreement.
• Harbour Assurance v. Kansa General International Insurance [1993] 1 Lloyd’s Rep. 455 (CA) (Court of Appeal): Held that an arbitration agreement is capable of surviving the invalidity of the contract, provided the arbitration clause itself is not directly impeached.
• Lesotho Highlands Development Authority v. Impregilo SpA and others [2005] UKHL 43 (House of Lords): Affirmed that an arbitration agreement is distinct from the principal contract.
• Fiona Trust & Holding Corporation v. Privalov [2007] EWCA Civ 20 (Court of Appeal): Held that the invalidity of the underlying contract would not preclude the arbitral tribunal from determining the issue.
• Fili Shipping Co Ltd and others v. Premium Nafta Products Ltd and others [2007] UKHL 40 (House of Lords): Opined that the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement itself, and not merely as a consequence of the invalidity of the main agreement.
• Prima Paint Corporation v. Flood & Conklin MFG. CO. 388 US 395 (1967) (U.S. Supreme Court): Held that claims of fraud in the inducement of the contract generally are to be decided by the arbitrator, unless the claim is fraud in the inducement of the arbitration clause itself.
• Buckeye Check Cashing, Inc v. Cardegna et. al, US SC 440 (2006) (U.S. Supreme Court): Followed the decision in Prima Paint and held that unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator.
• Rent -A- Center, West, Inc. v. Jackon 561 US 63 (2010) (U.S. Supreme Court): Opined that a challenge to the contract as a whole does not prevent a court from enforcing a specific agreement to arbitrate.
• Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. (2020) 2 SCC 455 (Supreme Court of India): Discussed the application of the doctrine of kompetenz-kompetenz in the Indian legislation.
• A. Ayyasamy v. Parmasivam & Ors. (2016) 10 SCC 386 (Supreme Court of India): Observed that the Arbitration and Conciliation Act, 1996, should be interpreted to minimize court intervention and strengthen the institutional efficacy of arbitration.
• Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209 (Supreme Court of India): Held that an arbitration clause in an agreement would not exist when it is not enforceable by law.
• Naina Thakkar v. Annapurna Builders (2013) 14 SCC 354 (Supreme Court of India): Followed the decision in SMS Tea Estates.
• Ram Rattan v. Parma Nand (1945 -46) 73 IA 28 (Privy Council): Interpreted the words “for any purpose” in the Indian Stamp Act to include collateral purposes.
• SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd. (2011) 14 SCC 66 (Supreme Court of India): Considered the issue of whether an arbitration agreement in an unregistered and unstamped lease deed was valid and enforceable. (Overruled on certain aspects by this judgment)
• SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618 (Supreme Court of India): Held that at the pre-reference stage, the Court may determine certain threshold issues.
• National Insurance Co. v. Boghara Polyfab (2009) 1 SCC 267 (Supreme Court of India): Held that at the pre-reference stage, the Court may determine certain threshold issues.
• Master Construction Company v. Union of India (2011) 12 SCC 357 (Supreme Court of India): Held that at the pre-reference stage, the Court may determine certain threshold issues.
• Duro Felguera v. Gangavaram Port Ltd. (2017) 9 SCC 729 (Supreme Court of India): Held that at the pre-reference stage, there must be minimal judicial intervention, and the only issue to be decided would be the existence of the arbitration agreement.
• Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019) 8 SCC 714 (Supreme Court of India): Affirmed the position in Duro Felguera.
• Hindustan Steel Limited v. M/s. Dilip Construction Company (1969) 1 SCC 597 (Supreme Court of India): Held that once the object of payment of Stamp Duty is satisfied, the party making a claim on the basis of that instrument, will not be defeated, on the ground of the initial defect or irregularity.
• Shriram EPC Limited v. Rioglass Solar SA (2018) 18 SCC 313 (Supreme Court of India): Held that the payment of Stamp Duty is applicable to awards made in India, but not to foreign awards.
• Avinash Kumar Chauhan v. Vijay Krishna Mishra (2009) 2 SCC 532 (Supreme Court of India): Held that the bar against the admissibility of an unstamped instrument is absolute.
• Black Pearl Hotels (P) Ltd. v. Planet M. Retail Ltd. (2017) 4 SCC 498 (Supreme Court of India): Held that the phrase “duly stamped” implies that the instrument must be stamped with the requisite amount of duty.
• N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72 (Supreme Court of India): Took the view that issues involving detailed investigation into allegations of fraud could not be dealt with by an arbitrator. (Overruled by this judgment in effect)
• Abdul Kadir v. Madhav Prabhakar AIR 1962 SC 406 (Supreme Court of India): Relied upon an English judgment rendered in Russel v. Russel.
• Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra (2012) 2 SCC 144 (Supreme Court of India): Held that at the pre-reference stage, the court is not required to examine allegations of fraud.
• Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710 (Supreme Court of India): Followed the twin test laid down in Ayyasamy.
• Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr. (2018) 15 SCC 678 (Supreme Court of India): Held that mere allegations of fraud are not sufficient to decline reference of disputes to arbitration.
• Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited) (2020) SCCOnLine SC 656 (Supreme Court of India): Held that the same set of facts may have civil as well as criminal consequences, and if a civil dispute involves questions of fraud, it does not cease to be arbitrable.
• Deccan Paper Mills v. Regency Mahavir (2020) SCCOnLine SC 655 (Supreme Court of India): Affirmed the view in Avitel Post Studioz.
• Vidya Drolia & Ors. v. Durga Trading Corporation (Supreme Court of India): Affirmed the judgment in Garware. (Referred to a Constitution Bench)
• Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532 (Supreme Court of India): Recognized examples of disputes which are not arbitrable.
• Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751 (Supreme Court of India): Dealt with consumer disputes.
• Vimal Kishor Shah & Others v. Jayesh Dinesh Shah & Others (2016) 8 SCC 788 (Supreme Court of India): Dealt with disputes relating to trusts.
• Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677 (Supreme Court of India): Opined that when a plea is taken to avoid arbitration on the ground of the underlying contract being void, the court is required to ascertain the true nature of the defence.
• State of West Bengal v. Associated Contractors (2015) 1 SCC 32 (Supreme Court of India): Dealt with the powers of the designate of the Chief Justice under Section 11 of the 1996 Act.

Legal Provisions

• Article 16(1) of the Model Law: Incorporates the doctrine of separability.
• Section 7 of the Contract Act, 1872: Requires the acceptance of a contract to be absolute and unqualified.
• Section 19 of the Indian Contract Act, 1872: Defines voidable agreements.
• Section 17 of the Indian Contract Act, 1872: Defines fraud.
• Section 10 of the Indian Contract Act, 1872: Defines what agreements are contracts.
• Section 3 of the Maharashtra Stamp Act, 1958: Specifies the instruments which are chargeable to stamp duty.
• Section 30 of the Maharashtra Stamp Act, 1958: Specifies by whom duties are payable.
• Section 32A of the Maharashtra Stamp Act, 1958: Specifies how undervalued instruments are to be dealt with.
• Section 33 of the Maharashtra Stamp Act, 1958: Specifies the examination and impounding of instruments.
• Section 34 of the Maharashtra Stamp Act, 1958: Specifies that instruments not duly stamped are inadmissible in evidence.
• Section 35 of the Maharashtra Stamp Act, 1958: Specifies that admission of an instrument cannot be questioned.
• Section 36 of the Maharashtra Stamp Act, 1958: Specifies admission of improperly stamped instruments.
• Section 37 of the Maharashtra Stamp Act, 1958: Specifies how impounded instruments are dealt with.
• Section 41 of the Maharashtra Stamp Act, 1958: Specifies endorsement of instruments on which duty has been paid.
• Section 58 of the Maharashtra Stamp Act, 1958: Specifies revision of decisions of courts regarding the sufficiency of stamps.
• Item No. 63 of Schedule I of the Maharashtra Stamp Act, 1958: Specifies the stamp duty on works contracts.
• Item 12 of Schedule I of the Maharashtra Stamp Act, 1958: Specifies the stamp duty on awards.
• Section 40 of the Indian Stamp Act, 1899: Provides the procedure for instruments which have been impounded.
• Section 42 of the Indian Stamp Act, 1899: Requires the instrument to be endorsed after it is duly stamped.

Ratio Decidendi

The Supreme Court’s ratio decidendi can be summarized as follows:

1. Separability of the Arbitration Agreement: The arbitration agreement is a separate and distinct agreement from the underlying contract. It is a collateral agreement that survives the termination or invalidity of the main contract. This principle is well-established in both domestic and international jurisprudence.
2. Stamp Duty and Arbitration Agreements: An arbitration agreement is not an instrument chargeable to stamp duty under the Stamp Act. Therefore, the non-payment of stamp duty on the main contract does not invalidate the arbitration agreement. The arbitration agreement can be enforced even if the main contract is unstamped, provided the arbitration agreement itself is valid.
3. Effect of Non-Stamping: Non-stamping of the main contract is a curable defect. The contract can be made admissible in evidence by payment of the required stamp duty and penalty.
4. Arbitrability of Fraud: Allegations of fraud are arbitrable unless the fraud vitiates the arbitration agreement itself or is of a public nature. Simple allegations of fraud do not preclude the parties from being referred to arbitration.
5. Minimal Judicial Intervention: Courts should adopt a minimal interventionist approach at the pre-reference stage. The court’s role is limited to determining the existence of a valid arbitration agreement, and other issues should be left for the arbitral tribunal to decide.
6. Statutory Remedy: A Writ Petition is not maintainable to challenge an order rejecting an application for reference to arbitration under Section 8 of the Arbitration Act. The statutory remedy of appeal under Section 37 of the Act should be availed.

Obiter Dicta

The Supreme Court also made the following obiter dicta:

• The Court emphasized the importance of the doctrine of competence-competence, which empowers the arbitral tribunal to rule on its own jurisdiction.
• The Court observed that the Stamp Act is a fiscal measure to secure revenue for the State and should not be used to defeat the rights of parties.
• The Court noted that the 2015 Amendment to the Arbitration Act has reduced the scope of judicial intervention at the pre-reference stage, and the focus is now on the existence of the arbitration agreement.
• The Court clarified that the judgment in SMS Tea Estates, insofar as it held that an arbitration agreement in an unstamped contract is not enforceable, stands overruled.
• The Court clarified that the judgment in Garware Wall Ropes, insofar as it held that an arbitration clause in an agreement would not exist when it is not enforceable by law, stands overruled.
• The Court clarified that the judgment in N. Radhakrishnan, insofar as it held that issues involving detailed investigation into allegations of fraud could not be dealt with by an arbitrator, stands overruled in effect.

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s judgment in NN Global Mercantile vs. Indo Unique Flame Ltd. is a landmark decision that clarifies the enforceability of arbitration agreements in unstamped contracts. The Court has reaffirmed the principle of separability of arbitration agreements and held that non-payment of stamp duty on the main contract does not invalidate the arbitration agreement. This judgment provides much-needed clarity and will have a significant impact on the enforceability of arbitration agreements in India.

The judgment also reinforces the pro-arbitration stance of the Indian judiciary and reduces the scope of judicial intervention at the pre-reference stage. The ruling clarifies that allegations of fraud are arbitrable unless they vitiate the arbitration agreement itself or are of a public nature. By overruling certain aspects of previous judgments, the Supreme Court has brought Indian jurisprudence in line with international best practices on arbitration.