Court: Supreme Court of India
Citation: (2021) 4 SCC 379
Petitioner: N.N. Global Mercantile Private Limited
Respondent: Indo Unique Flame Ltd.
Date of Judgment: April 25, 2023
Bench: Justice K.M. Joseph, Justice Ajay Rastogi, Justice Aniruddha Bose, Justice Hrishikesh Roy, Justice C.T. Ravikumar (3:2 Majority)
Brief facts of the case[1]
Indo Unique Flame Ltd. Indo Flame is a coal washing company. On 18 September 2015, Indo Flame acquired a tender to offer KPCL[2] coal washing services. According to the agreement, Indo Flame issued bank guarantees in favor of KPCL to ensure the fulfillment of contractual obligation.
On 28 September 2015, Indo Flame executed a sub-contract with NN Global Mercantile Pvt. Ltd. (“NN Global”), a coal transportation company. In this sub-contract, NN Global was engaged to transport the washed coal from the washery to a designated stockyard. The said sub-contract comprised of two imperative clauses:
- Clause 9: Bound NN Global to make a security deposit by furnishing a bank guarantee in favor of Indo Flame.
- Clause 10: Contained an arbitration clause that provided for the resolution of disputes by arbitration.
On 6 December 2017, aggrieved by certain disputes, KPCL invoked the bank guarantee furnished by Indo Flame. Responding to this, Indo Flame invoked the bank guarantee given by NN Global under the sub-contract on 7 December 2017. NN Global refused to abide by the bank guarantee alleging fraud in its invocation and subsequently filed a suit in the Nagpur Commercial Court seeking relief.
In its defence, Indo Flame sought to invoke the arbitration clause under Clause 10 of the sub-contract and moved an application under Section 8[3] of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). NN Global opposed the said application wherein it contended that the bank guarantee was a separate and independent contract wherein no arbitration clause is found, and thus, its invocation was fraudulent.
On 18 January 2018, the Commercial Court dismissed Indo Flame’s application and held that an arbitration clause incorporated into the sub-contract did not cover disputes regarding a bank guarantee.
In 2020, Indo Flame filed a writ petition before the Bombay High Court for referral of the dispute to arbitration. The High Court reversed the decision of the Commercial Court on 30 September 2020 by holding that the arbitration clause was valid and enforceable.
NN Global was dissatisfied with the judgment given by the High Court. It filed a Special Leave Petition before the Supreme Court.
A three-judge bench referred two critical issues to a five-judge bench for consideration.
Issues raised
1. Whether the arbitration clause contained in an unstamped document enforceable?
2. Whether the disputes relating to fraudulent invocation of a bank guarantee arbitrable?
Arguments from the petitioner (n.n. global)
NN Global relied on SMS Tea Estates v. Chandmari Tea Co. Pvt. Ltd. (2011) [4] that judgment that held the arbitration clause within an unstamped agreement to be invalid. The Plaintiff argued that the sub-contract was unstamped, and hence, the arbitration clause made therein was untenable and not enforceable. Thirdly, a mention was made of Garware Wall Ropers v. Coastal Marine Construction (2019) [5], wherein it was held that unstamped agreements contain invalid arbitration clauses. Fourthly, NN Global argued that invocation of bank guarantees to perpetuate fraud cannot be the subject matter of arbitration. It pointed out that a bank guarantee is an independent contract and distinct from the main contract between the parties and, thus, its invocation must be heard and decided by a court of law. Finally, NN Global contended that the insertion of Section 11(6A)[6] in the Arbitration Act does not prevail over the obligation to have arbitration agreements properly stamped. It submitted that the courts do not outstep their duty to deem the arbitral agreement valid before referring the disputes to arbitration.
Arguments from the respondent (indo flame)
Indo Flame submitted that section 11 (6A) of the Arbitration Act circumscribed judicial jurisdiction to the extent of ascertaining the “existence” of an arbitration agreement and not its validity. The latter argued that the arbitration agreement in the sub-contract existed and was valid, even though the sub-contract was not stamped. While dealing with the matter of fraudulent invocation of a bank guarantee, Indo Flame contended that such disputes are arbitrable since they are automatically connected with the performance of sub-contract which has an arbitration agreement itself. It held that the arbitration agreement has to be construed liberally in relation to any disputes arising out of sub-contract. In addition, Indo Flame pleaded the doctrine of severability. It submitted that the arbitration clause was an independent agreement in the sub-contract. The arbitration clause would survive and remain enforceable even if the sub-contract was unstamped.
RATIONALE OF THE COURT
The Supreme Court delivered several landmark judgments through its three stages of deliberation:
1. Three-Judge Bench Decision (January 2021)
The bench said that the decided SMS Tea Estates and Garware case has misinterpretated the statute concerned.
It had referred the matter of validity of unstamped arbitration agreements to a five-judge bench.
2. Five-Judge Bench Majority Opinion[7] (April 2023)
It held, in a 3:2 majority ruling, that contracts with unstamped or inadequately stamped arbitration agreements are nonenforceable until proper stamp duty and penalties are paid, according to the Indian Stamp Act, 1899.
Majority Opinion (Justice K.M. Joseph, Justice Aniruddha Bose, and Justice C.T. Ravikumar)
The following are the Judge’s opinions :
Sections 33[8] and 35[9] of the Stamp Act[10] explicitly require the impounding of unstamped documents and prohibit their use till the deficiency is rectified. This applies to arbitration agreements contained in such documents as well.
Even though this court holds the arbitration agreement separate from others, the exception from the duty of stamping does not exclude it. To hold otherwise would be to allow arbitration agreements to avoid stamping, undermining the statutory mandate.
Section 11[11] of the Arbitration Act requires the court to prima facie scrutinize whether an instrument is adequately stamped before passing matters to arbitration. Otherwise, judicial enforcement of illegal agreements becomes an inevitability.
Provisions under Stamp Act do not come into conflict with the Arbitration Act for these two enactments serve different purposes. Apex courts had to strike a balance between the requirements of the Stamp Act and the requirements of valid execution of the arbitration agreement.
Dissenting Opinion (Justice Ajay Rastogi and Justice Hrishikesh Roy)
The following are the opinion of the Judges :
It would not void a contract or its arbitration clause in case of insufficient stamping. Courts are free to refer the matter to arbitration and the arbitrator will deal with the stamping issue.
The Arbitration Act being a special law will override the procedural requirements of Stamp Act. The latter’s prima facie aim is raising revenue and not annulling agreements. Also Section 35 of Stamp Act permits rectification of unstamped document by paying the requisite duty and penalty.
Majority’s approach would lead to substantial delay defeating the purpose of arbitration, that being speedy dispute resolution. A pragmatic approach is thus required where it finds balance between complying with the law and being efficient.
Preliminary issues, including stamping should be decided by arbitrator under Section 16[12] of Arbitration Act.
Things held in 5 Judge Bench ( Short Conclusion)
- An arbitration agreement contained in an unstamped or insufficiently stamped contract is unenforceable until the stamp duty is paid.
- The decision reinforces strict application of the Stamp Act, potentially delaying arbitration proceedings.
- The doctrine of separability, while acknowledged, does not exempt arbitration agreements from compliance with the Stamp Act.
3. Seven-Judge Bench Decision (December 2023)
This implies that the bench overturned the majority opinion of the five-judge bench and upheld the validity of unstamped arbitration agreements.
It held that the absence of stamping was a curable defect and did not make the arbitration agreement void.
The Court emphasized that under Section 11(6A), the focus should solely be on the “existence” of the arbitration agreement. Judicial scrutiny into the validity of the agreement is impermissible at the referral stage.
Defect in the law
1. Conflicting judgments in SMS Tea Estates (2011), Garware Wall Ropers (2019) and NN Global Mercantile (2021)[13] have created uncertainty whether arbitration clauses would enforce in unstamped agreements. Judgmental conflicts on whether disputes over fraudulent bank guarantee invocation are arbitrable have given rise to precedential inconsistencies that undermined arbitration as the tool for comprehensive resolution of disputes.
2. The compulsion of stamping increases litigation and delays arbitration, making the arbitration mechanism not only time-consuming but also cost-incurring. The referring of stamping cases to the courts at the pre-referral stage causes significant delay as it defeats the purpose of arbitration, which is that it is a time-efficient process.
3. Where the Stamp Act is applied rigidly, that conflicts with the Arbitration Act’s ostensible aim to facilitate speedy proceedings with minimal judicial intervention, here arbitration is hamstrung by a bottleneck. The Courts have conflicting demands upon them – validating arbitration agreements under the Arbitration Act while also applying the Stamp Act thereby complicating and prolonging arbitration referrals into courts, which runs counter to the very simplicity and expediency of arbitration.
Inference
This is a landmark shift in Indian jurisprudence on arbitration-a seven-judge bench judgment delivered in December 2023. The decision that unstamped arbitration agreements are valid reinforces the court’s policy of judicial restraint in arbitration proceedings, which is the general trend across jurisdictions.
The rule makes it clear that procedural defects, such as nonstamp notice, can be cured and, therefore, do not invalidate the arbitration agreement itself. Again, this is efficiency-building and helps speed up the arbitration process.
The Court also discussed severability and confirmed the principle that an arbitration clause constitutes an independent agreement capable of surviving defects in the underlying contract.
However, questions are still left unscathed. The arbitrability of disputes relating to bank guarantees raises further questions which ought to be clarified better by judicial pronouncement. The reliance of this judgment on curative measures for unstamped agreements may also cause practical problems in relation to compliance and enforcement.
The Stamp Act and Arbitration Act have conflicting objectives and thus require amendments in legislation. This includes allowing arbitrators to question stamping issues but providing revenue interests.
The judgment itself is a success of pro-arbitration attitude taken by India and strives towards becoming a global house for arbitration.
[1] Validity of Unstamped Arbitration Agreement, Supreme Court Observer (Nov. 18, 2024), https://www.scobserver.in/cases/validity-of-unstamped-arbitration-agreement/amp/
[2] Karnataka Power Corporation Limited
[3] Power to refer parties to arbitration where there is an arbitration agreement
[4] SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd., (2011) 14 SCC 66
[5] Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., 2019 9 SCC 209
[6] “The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.”
[7] Shah, S., N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited & Ors. – A Step Forward and Then Backward, MONDAQ (Nov. 20, 2024), https://www.mondaq.com/india/arbitration-dispute-resolution/1348500/nn-global-mercantile-private-limited-vs-indo-unique-flame-limited-ors-a-step-forward-and-then-backward
[8] Examination and impounding of instruments
[9] Instruments not duly stamped inadmissible in evidence, etc.
[10] Indian Stamp Act, 1899
[11] Appointment of Arbitrators
[12] Competence of arbitral tribunal to rule on its jurisdiction
[13] NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors., (2021) 4 SCC 379
Author: Anurag, Student at Chhatrapati Shahu Ji Maharaj University, Kanpur
