The decision of the 3-Judge Bench of the Supreme Court of India in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (Global Mercantile) has undoubtedly marked the inception of a new era of pro-arbitration jurisprudence in India. The seminal judgment of the Supreme Court delivered on 11-1-2021 has brought India more in consonance with the opinions of the courts in the western world that have pioneered International arbitration jurisprudence for decades. The present article will study the far-reaching effect of the judgment and will highlight the manner in which the Supreme Court through its cogent and contemporary reasoning has discarded the fetters that recalcitrant parties would weaponise to circumvent their obligations in honouring valid arbitration agreements.
It is important to take note of the facts that led to the dispute. Respondent 1 Indo Unique (Indo Unique) was awarded a work order from the Karnataka Power Corporation Ltd. (KPCL) for washing of coal. Thereafter, in pursuance of the said work order Indo Unique furnished a bank guarantee in favour of KPCL through Respondent 2 State Bank of India (SBI). Subsequently, the Indo Unique entered into a sub-contract with the appellant Company N.N. Global Mercantile (Global Mercantile) for transportation of coal. Clause 9 of this sub-contract contained provisions for a security deposit to be furnished by Global Mercantile. Clause 10 embodied an arbitration agreement for resolution of disputes arising from the sub-contract. Accordingly, Global Mercantile furnished a bank guarantee in favour of SBI. Certain disputes arose under the principal contract that led to the invocation of the bank guarantee by KPCL. Further, Indo Unique invoked the bank guarantee furnished by Global Mercantile under the sub-contract. The invocation of the bank guarantee under the sub-contract led to a series of proceedings that stemmed from decision of the Commercial Court in Nagpur which was eventually challenged before the Bombay High Court by way of a writ petition filed under Articles 226 and 227 of the Constitution of India. The High Court rejected the findings of the commercial court and through its judgment held that there was a valid arbitration agreement between the parties whilst allowing an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act) to be maintained. The High Court further went on to reject the contention that the alleged fraudulent invocation of the bank guarantee could not be resolved through arbitration. The High Court also held that the contention of the arbitration agreement being unenforceable as the sub-contract was unstamped could be raised at the time of filing an application under Section 11 of the Act or at any other appropriate time before the Arbitral Tribunal. Aggrieved by the decision of the Bombay High Court, Global Mercantile preferred to exercise its constitutional remedy and filed a special leave petition before the Supreme Court of India.
The Supreme Court had to deal with three issues, two of which are within the purview of the present article. The first issue was whether an arbitration agreement would be enforceable if it was present in an agreement which was unstamped and unenforceable under the relevant Stamp Act. The second issue was whether the allegation of fraudulent invocation of the bank guarantee was a subject-matter capable of settlement by arbitration.
The Supreme Court while passing its judgment has placed a heavy reliance on the doctrines of separability and kompetenz-kompetenz whilst noting their importance in modern and contemporary arbitral jurisprudence. The Supreme Court relied on international arbitral jurisprudence of the global arbitration hotspots such as UK, US and France whilst reiterating the need to give effect to the essence of the 1985 UNICITRAL Model Law on which the Arbitration and Conciliation Act is based. The Court also noted the legislative intention of minimising judicial interference in the arbitration process and highlighted the rationale behind the amendment of Section 11 of the Act in 2015.
The Court at the time of applying the law to the facts that had arisen before it noted some of its earlier decisions. In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (SMS Tea) where inter alia the Court held that an unstamped agreement cannot be acted upon to enforce an arbitration agreement contained in it. The judgment in SMS Tea propounded a dichotomy between the two aspects of an unregistered and an unstamped agreement. The Court in SMS Tea while succinctly applying the doctrine of separability to the aspect of non-registration held that the non-registration of an agreement would not affect the unenforceability of the arbitration agreement contained in it. However, with regard to the aspect of non-payment of stamp duty the Court held that the strict and mandatory provisions of the Stamp Act could not be read harmoniously with the relevant provisions of the Arbitration and Conciliation Act. It is pertinent to note here that the judgment in SMS Tea was passed before the 2016 Amendment of Section 11 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. where at the pre-reference stage under Section 11(6) of the Act certain threshold issues could be examined by the Court.
The Court in Global Mercantile while went on to note the importance of minimising judicial intervention at the pre-reference stage after the amendment of Section 11 of the Act and corresponding legislative overruling of Patel Engg. found itself at odds with another judgment of the same court which was interestingly passed after the addition of sub-section (6-A) to Section 11. In Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd. (Garware) the Court delivered a judgment placing heavy reliance on the ratio laid by Raveendran, J. in SMS Tea. The two-Judge Bench although employing a slightly different hypothesis came to the same conclusion as in SMS Tea. The Court in Garware went on to state 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 therefore on a conjoint reading of the relevant provisions of the Stamp Act, Contract Act and Arbitration and Conciliation Act determined that an unstamped agreement could not be enforced by law. It appears that the Court in Garware has failed to recognise the rationale behind the fiction of separability and has wrongly tied the fate of the arbitration agreement to the substantive contract.
Coming back to the Global Mercantile, after studying the current position on law as it stood, the Court went on to deliver an opinion to the contrary. The Court held that the non-payment of stamp duty on the substantive commercial contract would not render the arbitration agreement contained in it as unenforceable or invalid. The Court went on to reason by adopting a harmonious construction between the mandatory provisions of the relevant Stamp Act and its duty to enforce arbitration agreements. The Court relied extensively on the doctrine of separability, filling in the inadequacy of Court’s ratio in Garware. The Court also noted that the non-payment or deficiency under the Stamp Act was a curable defect and therefore there was no need to stay arbitration until stamp duty is paid. Accordingly, the Court overruled the position in SMS Tea on this issue. The Court also expressed dissent with the findings in Garware. The Court noted that the position in Garware was recently affirmed by the judgment of a coordinate Bench in Vidya Drolia v. Durga Trading Corpn. The Court noting that it could not hold the position laid down in Garware as per incuriam referred this question to be determined by a Constitutional Bench of 5 Judges. In addition to this, the Court in Global Mercantile laid down clear and simple guidelines as to the method in which the unstamped instrument is to be dealt with at the time of appointment of Arbitrator. Interestingly, the Court distinguished the purpose of Section 11 from Section 9 and laid down that in case of an application filed under 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.
Moving on to the second issue of whether the allegation of the fraudulent invocation of the bank guarantee was arbitrable, the Court relied upon various judgments of its own and stated that the earlier notions which courts harboured to hold fraud as non-arbitrable were wholly archaic and obsolete. The Court discarded these apprehensions that were commonly predicated on assessment of voluminous evidence, lack of expertise of arbitrators, inadequacies of arbitral regime and the misconceived notions of domestic public policy and thereby held fraud as arbitrable.
The approach adopted by the Indian Supreme Court in Global Mercantile has been long awaited by the arbitration community in India. The Supreme Court has adopted a holistic, well-balanced and a contemporary approach in discarding the long persisting apprehensions of the Indian courts that provoked them to unduly interfere in arbitration proceedings. This judgment has put to rest many dilatory tactics that recalcitrant parties often used to evade their obligation to honour valid arbitration agreements.
The Supreme Court through its succinct and cogent reasoning has extracted the true meanings of the twin doctrines of separability and kompetenz-kompetenz in order to safeguard the fate of valid arbitration agreements and the competence of the Arbitral Tribunal to rule on its own jurisdiction. The judgment has settled all the misconceptions pertaining to the arbitrability of fraud in India which has definitely been one of the most extensive controversies in Indian arbitral jurisprudence for decades. It is also true that the Indian courts have all too often erroneously entangled the non-arbitrability attacks with the validity of the arbitration agreement and engaged in a jurisdictional tug of war with Arbitral Tribunals instead of correctly treating it as a jurisdictional element. The Court in Global Mercantile seems to have corrected the semantics and has allowed the Arbitral Tribunal to deal with issues of arbitrability, recognising its inherent power bestowed by the doctrine of kompetenz-kompetenz enshrined in Section 16 of the Act. The Court seems to have recognised that they can always have a second look at the time of enforcement or setting aside of the award. In addition to this, the Court has also noted the importance of paying attention to the intention of the legislature which is evident from the series of amendments made to the Act over recent years and has also laid emphasis on the importance of the Reports of the Law Commission of India. This judgment has minimised undue judicial interference which often occurred at the time of applications made under Sections 8, 9 and 11 of the Act and has thereby improved the overall efficacy of the arbitration process for the Indian business community. It is my opinion that the judgment of the Court has met an international benchmark and has improved the prospect of India becoming a favourable seat for international commercial arbitrations in the near future. The Court has also shown its willingness to uphold essence of the 1985 UNCITRAL Model Law and the need to honour India’s commitment under the 1958 New York Convention. It is true, that international arbitration is governed by transnational principles of law that transcend the idiosyncrasies of national courts and legislatures and the judgment of the Indian Supreme Court in Global Mercantile has definitely gone a long way in instilling confidence in the minds of the international business community with regard to the new arbitration regime in India.
† Hiroo Advani, Senior Managing Partner at Advani & Co.
†† Manav Nagpal, Associate at Advani & Co.