N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.

Introduction:

The case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[1]. revolves around the interplay of The Arbitration and Conciliation Act, 1996 andIndian Stamp Act, 1899.It questions the validity of an arbitration agreement contained in an unstamped contract. This case marked a significant shift in the Court’s stance on the distinction between a void and admissible agreement.

Background:

The dispute arose from a Special Leave Petition seeking clarity on whether an unstamped arbitration agreement could be legally enforced. Under Indian law, an unstamped instrument is inadmissible in evidence, meaning it cannot be acted upon until the stamp duty is paid.

In this case, the arbitration clause was embedded within a substantive commercial contract, bringing into play three key legislations:

• The Indian Stamp Act, 1899, which governs the stamping of instruments;
• The Arbitration and Conciliation Act, 1996, which promotes minimal judicial interference in arbitration; and
• The Indian Contract Act, 1872, which defines contractual obligations and validity.

The Supreme Court initially ruled in April 2023 that such an agreement was void and unenforceable. However, this view was later overturned by a seven-judge bench in December 2023, which held that while the issue of stamp duty must still be addressed, an unstamped arbitration agreement is not void.

The bench, led by Justice Indu Malhotra, held that the arbitration agreement is separate and distinct from the main contract applying the doctrine of separability. Consequently, non-payment of stamp duty does not invalidate either the arbitration clause or the underlying agreement, since the defect is curable under law.

Facts Of The Case:

1. Indo Unique Flame Ltd. (a coal washing company) obtained a contract from Karnataka Power Corporation Ltd. (KPCL) and, as part of the contract, provided a bank guarantee in KPCL’s favor.
2. Indo Flame signed a subcontract with NN Global Mercantile Pvt. Ltd. on September 28, 2015, for the transportation of coal from a washery to a stockyard. Clause 9 of this subcontract called for a security deposit, and Clause 10 included an arbitration clause. According to Clause 9, NN Global provided the bank guarantee in favour of Indo Unique.
3. In December 2017, due to alleged work differences, KPCL invoked the bank guarantee provided by Indo Unique Flame.
4. Indo Unique, in turn, invoked the guarantee that NN Global had provided in its favor.NN Global refused to pay the bank guarantee and filed a suit in the Nagpur Commercial Court. 

Issue:

1. Whether an unstamped or inadequately stamped instrument containing an arbitration clause is valid and enforceable under law?
2. Whether courts, at the stage of reference under Sections 8 or 11 of the Arbitration and Conciliation Act, can examine the sufficiency of stamp duty?

Petitioners Argument:

The learned senior Counsels representing the petitioners side contended that N. N. Global 2 has not laid down the correct position of law.

1. The petitioner referred to Section 11(6A) that outlines the referral court’s power under of the Arbitration Act.The counsel argued that Section 11(6A) limits the authority of the referral court to examine the arbitration agreement, not the instrument itself. Arbitration act alsolimits the judicial intervention in an arbitration process. The requirement for stamping does not render an instrument void, but merely makes it inadmissible in court.
2. The non-payment or deficiency of stamp duty is a procedural inconsistency, that can be corrected. The effect of this defect ceases to exist once the revenue interest of the state is secured, and hence does not render the agreement void.Hence, mandating the courts at Section 8 or 11 stage of the act to examine the issue relating to the stamping defeats the purpose of Section 5 of the act.
3. The counsel stated that the Doctrine of separability recognizes that an Arbitration agreement is self-contained and distinct from the underlying contract. And hence the inadmissibility of the document on account of it not being stampeddoes not result in the document being void, invalid or non- existence on law.
4. He also stated that the majority in N N Global 2 disregarded the Doctrine of Competenceby mandating the referral court under section 11 to examine the stamping instruments, leaving all stamping issues left to the arbitral tribunal’s decision, and ignoring Section 33 of the Stamp Act.

Respondent’s Argument:

The learned senior Counsels representing the respondent side supported the majority view in N. N. Global 2, stating that it correctly sets out the legal position.

1. The counsel for Respondent asserted that the court’s authority under section 11(6A) is not restricted to merely verifying for theexistence of an arbitration agreement.  . The referral court must also examine its validity, which includes checking for sufficient stamping under the Stamp Act existence of an arbitration agreement.
2. The respondents acknowledge the principle that the arbitral tribunal can rule on its own jurisdiction, including the validity of the arbitration agreement. However, they assert that this does not override the mandatory duty of courts under Section 33 of the Stamp Act to impound unstamped or insufficiently stamped instruments before appointment of arbitrators. Therefore, stamping is a threshold issue the court must address, not one that can be left solely to the arbitral tribunal.During referral procedures, courts must impound instruments that are not stamped or that are not appropriately stamped; these instruments cannot be admitted or used until the duty and penalty have been paid.
3. The stamping requirement is a substantial legal demand rather than a mere procedural formality. A non-compliant agreement cannot be legally enforced and does not exist for referral purposes unless it is duly stamped.
4. The respondents argue that while this doctrine recognizes the arbitration agreement as independent from the main contract, it does not exempt the agreement from compliance with statutory requirements like proper stamping. Thus, an arbitration clause, even if considered separate ,cannot be enforced or acted upon unless the instrument containing it is duly stamped as per the Indian Stamp Act.

Thus, the respondents argued that stamping requirements are integral to the existence and enforceability of an arbitration agreement, and courts must ensure compliance before permitting arbitration.

Judgement

The seven-judge bench of the Supreme Court held that while agreements that are unstamped or inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act, such agreements are not void, void ab initio, or inherently unenforceable. This is done to draw a clear distinction between an agreement that is void (under section 27 of the Indian Contract Act 1872) and an agreement that is inadmissible in court. Non-stamping or defective stamping is recognized as a curable defect.

The Court clarified that objections regarding stamping do not arise for determination under Sections 8 or 11 of the Arbitration Act; instead, courts at these stages are required only to examine whether an arbitration agreement prima facie exists.

It is to be highlighted that Section 11(6-A) of the Arbitration Act explicitly states that courts must restrict themselves to the existence of an arbitration agreement and not to its admissibility. Any objection relating to stamping of the agreement falls within the domain of the arbitral tribunal rather than the referral court as empowered under section 16 of the Arbitration Act.

Importantly, the judgments in NN Global 2 and SMS Tea Estates[2], as well as in Garware Wall Ropes[3] the SC held that contracts (including agreements) are only enforceable under Section 11(6A) of the Arbitration Act if they are duly stamped. The purpose of Section 11, Banerjee said, was for the Court to appoint an arbitrator and leave questions of validity to the Arbitral Tribunal under Section 16, have been overruled to the extent that they conflicted with these findings.

This judgment clarifies the independent status and enforceability of arbitration clauses, reduces scope for judicial intervention at the reference stage, and aligns Indian law more closely with international arbitration practice

Principles Applied:

The Supreme Court recognised a few fundamental principles that ensure the arbitration is efficient and speedy in its dispute resolution mechanism.

Principle of Separability of the arbitration agreement

The doctrine of separability simply states that an arbitration clause or agreement can be viewed separately from the main contract and hence survive even after the termination of a contract. This is done to ensure that the arbitration clause survive as a mode of settlement even after the termination of an agreement or contract. This doctrine is rooted in four key

• The intention of the parties to subject any arising dispute,
• Prevent parties from evading commitment be asserting invalidity of the contract
• Treating arbitration as two separate entities
• Would subject matters of arbitration to the courts based on their merits, instead of the Arbitral Tribunal.

Doctrine of Competence- Competence

The Doctrine of Competence- Competence incorporated under section 16 of the Arbitration and Conciliation Act, empowers the Arbitral Tribunal to determine its own jurisdiction.Borrowed from the German legal concept competence- competence, it states that arbitrators possess the authority to make conclusive determination on their own jurisdiction preventing them from the scrutiny of subsequent judicial review.

This doctrine essentially restricts courts involvement at the referral stages, i.e. the existence and validity of the arbitration agreement. Though this doctrine bars courts from considering challenges to the Tribunal’s jurisdiction until an arbitrator has had the opportunity to address them. Which essentially means that any court may only intervene in an arbitrational matter after the award is sanctioned.

Arbitration as a form of Alternate Dispute Mechanism was implemented to ensure efficient, speedy and conclusive decisions to be made for disputes arising between parties. This has led to the national courts acknowledge the voluntary transfer of adjudicatory authority from the judiciary to the arbitral tribunal, based on the mutualconsent of the parties. These doctrines collectively ensure that the Arbitral tribunal is safeguarded and there is  effectiveness, independence, and finality in the arbitration process.

Conclusion:

In conclusion, the N.N. Global Mercantile case highlights Harmonious Construction of the Statue to ensure that any interpretation of the statute is not against the speedy resolution of the dispute.This case stands as a landmark in upholding arbitral autonomy through the doctrines of separability and competence-competence. It clarifies the procedural defects in the Arbitration and Conciliation Act, 1996, like how a curable defect such as non-stamping of an agreement does not invalidate arbitration agreements, thereby reinforcing the principles of minimal judicial interference, party autonomy, and efficiency. Setting a precedent for any further interpretation to be made in the Arbitration Act and its scope.

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[1](2023) 7 SCC 1: 2023 SCC ONLINE SC 495

[2](2011) 14 SCC 66

[3](2019) 9 SCC 209

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Author Name-  Aastha Parab and Rachel Anna Mathew,  
fifth-year B.L.S. LL.B. students at Vivekananda Education Society’s College of Law, Mumbai.