NN Global Merchantile Pvt. Ltd. Versus Indo Unique Flame Ltd. & Others

The case of N.N. Global Mercantile Pvt Ltd. v. Indo Unique Flame Ltd. & Others. discusses very interesting issues, the first being the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded; second, whether an arbitration agreement would be non-existent in law, invalid or un-enforceable, if the underlying contract was not stamped as per the relevant Stamp Act; and third, whether allegations of fraudulent invocation of the bank guarantee furnished under the substantive contract, would be an arbitrable dispute.

The decision of the Three-Judge Bench of the Supreme Court has taken a very pro-arbitration approach by repudiating and discarding the old prevalent concept of judicial interference in arbitration proceedings.

The Apex Court, whilst discussing various pronouncements with regards to arbitral jurisprudence held in the United States of America (USA), United Kingdom (UK) and France, has discussed and relied on the Doctrines of Separability and kompetenz-kompetenz, and how the same is important and applicable in the modern day arbitral jurisprudence. 

The Supreme Court has also discussed its earlier decisions including SMS Tea Estates Pvt Ltd Chandmari Tea Co. Pvt Ltd (“SMS Tea Estates Case”) Garware Wall Ropes Ltd. v. Coastal Marine Construction & Engineering Ltd. (“Garware Case”) which talked about invoking arbitration agreement in an unstamped document.

The present article discusses the doctrines applied by the Supreme Court of India in the present case; various judicial pronouncements and observations made in the Court of the USA, UK and France, and further discussing the essence of the UNCITRAL Model Law of 1985 on which the Arbitration and Conciliation Act is based.

FACTS OF THE CASE

1. Indo Unique Flame Ltd (“Indo Unique”), the Respondent No.1, applied for grant of washing of coal to Karnataka Power Corporation Limited (KPCL) in an open tender, which tender was thereafter awarded to Indo Unique vide Work Order dated 18th September, 2015.
2. Indo Unique furnished a Bank Guarantee of 29.29 crores in favour to KPCL through its banker, State Bank of India (SBI), Respondent No. 2. 
3. Subsequently Indo Unique entered into a subcontract with N.N. Global Mercantile (“Global Mercantile”), the Appellant Company, for transportation of coal. Clause 9 of the subcontract provided for furnishing of a Bank Guarantee of 5 crores, and further consisted of an Arbitration clause under Clause 10 of the subcontract. Accordingly, Global Mercantile furnished a bank guarantee in favour of Indo Unique.
4. Certain disputes arose between Indo Unique and KPCL which led to the invocation of the bank guarantee by KPCL under the principal contract. Further Indo Unique invoked the bank guarantee under the subcontract.
5. The invocation of the bank guarantee under the subcontract led to a series of proceedings which began by filing of a commercial suit in the Commercial Court of Nagpur by Global Mercantile alleging that the invocation of bank guarantee was fraudulent. 
6. The Commercial Court vide an ex parte ad interim order directed status-quo to be maintained with respect to the enforcement of the Bank Guarantee. Thereafter, Indo Unique filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 in the Commercial Suit seeking reference of disputes to arbitration, which was opposed by Global Mercantile arguing that the bank guarantee was separate and independent contract which did not contain an arbitration agreement, hence the application was not maintainable.
7. The Commercial Court rejected the Application under Section 8 holding that the bank guarantee was an independent contract not coming under the purview of the Arbitration Agreement.
8. Thereafter, Indo Unique then filed Civil Revision Petition before the Bombay High Court challenging the Order passed by the Commercial Court. On an objection being raised on the maintainability of the Civil Revision Petition, the High Court of Bombay permitted the withdrawal of the Civil Revision Petition, with liberty to file a petition under Articles 226 and 227 of the Constitution of India.
9. As a consequence, Indo Unique filed a Writ Petition before the Bombay High Court to quash and set aside the order passed by the Commercial Court. The High Court held that it was an admitted position that there was an arbitration agreement between the parties, and therefore the application under Section 8 was maintainable. With respect to the contention that the invocation of the Bank Guarantee was fraudulent, it was held that the allegations of fraud did not constitute a criminal offence that would entail recording of voluminous evidence. The disputes could be resolved through arbitration, and the filing of the Suit before the Commercial Court was not justified. The Commercial Court was not justified in restraining the invocation of the bank guarantee in the absence of any finding on fraud or special equities.
10. On the issue of the arbitration agreement being unenforceable since the Work Order was unstamped, it was held that the Global Mercantile could raise the issue either under Section 11 of the Arbitration Act, or before the arbitral tribunal at the appropriate stage. The Writ Petition was held to be maintainable and the Order passed by the Commercial Court was set aside. 
11. Aggrieved by the judgment of the High Court, Global Mercantile filed a Special Leave Petition before Supreme Court assailing the said order passed by the Bombay High Court.

ISSUES BEFORE THE COURT

There were three issues before the Apex Court, to deal with, the first one being whether an arbitration agreement would be enforceable and acted upon even if the contract is not stamped under the relevant Stamp Act. Second, whether allegation of fraudulent invocation of bank guarantee is an arbitral dispute. Third, whether a Writ Petition under Articles 226 and 227 of the Constitution is maintainable to challenge an order rejecting a Section 8 application?

THE JUDGMENT

The Supreme Court while addressing the first issue, observed that it is a settled principle in arbitration jurisprudence that an arbitration agreement is a distinct and separate agreement, independent of the substantive contract in which it is embedded. The Court placed heavy reliance on the Doctrine of Separability and kompetenz-kompetenz, stating that the autonomy of the arbitration agreement is based on these twin concepts. The Court stated that the doctrine of separability of an arbitration agreement connotes that the invalidity, ineffectiveness or termination of the substantive commercial contract does would not affect the validity of the arbitration agreement, and further that the doctrine of kompetenz-kompetenz implies that the arbitral tribunal is competent to determine and rule on its own jurisdiction including objections with respect to existence, validity and scope of the arbitration agreement. The Court noted that the judicial scrutiny or challenge before the court is maintainable only when the final award is passed as provided under Section 16(6) of the Arbitration and Conciliation Act.

The Court relied on various international precedents one of them being the English case of Heyman v. Darwins Ltd. wherein the doctrine of separability was expounded. The Apex Court also noted cases, including Bremer Vulkan Schiffbau und Maschinefabrik v. South India Shipping Corporation wherein Lord Diplock cited Heyman case asserting that, “The arbitration clause constitutes self-contained contract collateral or ancillary to the shipbuilding agreement itself”. The Supreme Court further relied on the landmark French case of Gosset v. Caparelli wherein the French Court, which recognised the doctrine of separability in broader terms, observed that the arbitration agreement is completely autonomous in law which excludes the possibility of it being affected by the possible invalidity of the main contract.

The Court further discussed the UNCITRAL Model Law (the “Model Law”) on which the Indian Arbitration and Conciliation Act 1996 (the “Act”) is based. The Apex Court placed its reliance on Section 16 of the Act and the Model Law, which gives statutory recognition to the doctrine of separability and kompetenz-kompetenz and that the invalidity of the contract does not affect survival of arbitration agreement. The Court, with regards to section 5 of the Act, also stated that Section 5 enshrines the legislative policy of minimal interference by court except as specified in the Act, and further that a conjoint reading of Section 5 and Section 16 would indicate that all civil commercial matters, including the issue whether the commercial contract was voidable, can be resolved through arbitration. The Court discussed the case of Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. and TRF Ltd. v. Energy Engg. Projects Ltd. wherein the legislative intention of minimising judicial interference in the arbitration proceedings was noted and further highlighted the rationale behind the amendment of Section 11 of the Act in 2015, that the court should only look at one aspect the existence of an arbitration agreement. 

In the case of Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. the courthighlighted the following observation:

“7.7. Based on the recommendations of the Law Commission, Section 11 was substantially amended by the 2015 Amendment Act, to overcome the effect of all previous judgments rendered on the scope of power by a non-obstante clause, and to reinforce the kompetenz-kompetenz principle enshrined in Section 16 of the 1996 Act…”

The Court stated that, “In view of the provisions of Section 16, and the legislative policy to restrict

judicial intervention at the pre-reference stage, the issue of limitation would require to be decided by the arbitrator. Sub-section (1) of Section 16 provides that the Arbitral Tribunal may rule on its own jurisdiction, “including any objections” with respect to the existence or validity of the arbitration agreement. Section 16 is as an inclusive provision, which would comprehend all preliminary issues touching upon. The issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the pre-reference stage under Section 11 of the Act. Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.”

The Court highlighted the opinion of Dr D.Y. Chandachud J, in the case of A Ayyasamy v. Parmasivam which is as follows:

“53. The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle.”

Discussing the issue of maintainability of arbitration in an unstamped document the court discussed the statutory scheme of the Maharashtra Stamp Act, 1958, and further went on to note some of its earlier decisions. In the case of SMS Tea Estates Pvt Ltd v. Chandmari Tea Co. Pvt Ltd the court, inter alia, held that an unstamped agreement cannot be acted upon to enforce an arbitration agreement contained in it. However, an arbitration agreement in an unregistered but compulsory registrable document can be acted upon and enforced. The Court is SMS Tea Estate postulated existence of a dichotomy between two aspects, unregistered agreement and unstamped agreement. It is pertinent to note here that the judgment in SMS Tea was passed before the Amendment of Section 11 in 2016 of the Act and the law as it stood then was based on the decision of the Constitutional Bench in SBP & Co. v. Patel Engg. Ltd. and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.7 where at the pre-reference stage under Section 11(6) of the Act certain threshold issues could be examined by the Court. 

The Court also noted its earlier decision in Garware Wall Ropes Ltd. v. Coastal Marine Constructions Engg. Ltd. which followed the judgment in the SMS Tea Estates case. The Court in Garware case came to the same conclusion as SMS Tea Estates case stating that an arbitration clause in a contract would be enforceable only if the contract was enforceable in law. Further, it went on to state that a contract would become enforceable only if it is duly stamped. The Court held that when an arbitration agreement is contained in a contract, it is significant that the agreement only becomes a contract if it is enforceable by law. Further that on a plain reading of Section 11(6-A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration agreement in a contract would not exist when it is not enforceable by law.

However, in the present case of NN Mercantile, the court made an observation which is contrary to the aforementioned earlier judgments of the Court. The Court stated that the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty, the nonpayment of stamp duty on the commercial contract, would not invalidate the arbitration clause, or render it unenforceable, since it has an independent existence of its own. The Court further stated that non-payment of stamp duty on the substantive contract is a defect which can be cured by paying requisite stamp duty, and would not invalidate even the main contract. Therefore, the Court overruled the decision made in the SMS Tea Estate case. The Court differed with the finding of the Garware case and referred the Garware case to be determined by a Constitutional Bench of five judges. The Court in the NN Mercantile case laid down modes to refer disputes to arbitration in an unstamped agreement. The court also stated that with regards to Section 9 of the Act, praying for urgent ad-interim reliefs, the Court would first have to grant ad-interim relief to safeguard the subject matter of the arbitration and then impound the instrument for payment of requisite stamp duty.

With regards to the issue of allegation of fraudulent invocation of bank guarantee was an arbitral dispute, the Court relied on various judgements and stated that mere allegations of fraud simplictor are not a sufficient ground for not referring to arbitration. They also observed the ground on which fraud was held to be non-arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. The Court held such grounds to be an archaic view, which has become obsolete. However, the Court noted that the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law.

With regards to the issue of maintainability of Writ Petition before the High Court, the Court was of the view that there was availability of a statutory remedy and therefore, the Writ Petition challenging the order of the Commercial Court before the High Court was not maintainable. The Court took notice of Section 13 (1A) of the Commercial Courts Act 2015, which has provisions to file an appeal before the Commercial Appellate Tribunal against the order of a Commercial Court.

CONCLUSION

The decision of the Apex Court in the NN Mercantile case has given a very succinct reasoning to the applicability of the doctrine of separability and kompetenz-kompetenz. The Court has upheld the letter and spirit of the Arbitration Act which is based on the UNCITRAL Model Law 1985, and clearly defined the jurisdiction of the Arbitral Tribunal, and has highlighted the legislative intent of minimal interference and judicial scrutiny by Courts. This decision of the court would definitely improve the efficacy of arbitration proceedings. The Court has taken a very holistic and balanced approach towards the issues involved thereby discarding unnecessary judicial interference which may occur in applications filed under sections 8, 9 and 11 of the Act. The court has also observed that fraudulent acts are sufficient grounds for arbitration unless it involves the criminal aspects of forgery, fraud or fabrication, which would are bound to be penalised under the relevant criminal laws.