All civil and commercial disputes can be adjudicated and resolved through arbitration: SC

All civil or commercial disputes, either contractual or non contractual, which can be adjudicated upon by a civil court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded either expressly by statute, or by necessary implication. (Para 8.10)

M/s N.N. Global Mercantile Pvt. Ltd. vs. M/s Indo Unique Flame Ltd. & Others

Civil Appeal Nos. 3802 - 3803 / 2020

Decided on 11th January, 2021

A three judge bench comprising of Justice Dr Dhananjaya Y Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee decided the case. The court decided some interesting issues with respect to the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded.

Indo-Unique Flame Ltd., respondent 1 (R1) was awarded a work order for the work of beneficiation/washing of coal by the Karnataka Power Corporation Ltd. (“KPCL”) in an open tender. R1, then, furnished Bank Guarantees for Rs.29.29 crores in favour of KPCL through its bankers, State Bank of India (SBI), respondent 2 (R2). For the transportation of coal from its washery to stockyard, R1 entered in a sub-contract with the appellant M/s. N.N. Global Mercantile Pvt. Ltd. (Global Mercantile). Global Mercantile also furnished a Bank Guarantee for Rs.3,36,00,000/- on 30.09.2015, in favour of SBI-the banker of Indo Unique. Certain disputes aroused between KPCL and R1, so KPCL invoked the bank guarantee and after that, R1 invoked the Bank Guarantee furnished by Global Mercantile.

In the given case, three main issues were considered by the Hon’ble Court,

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 allegation of the fraudulent invocation of the bank guarantee is 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?

The court, explaining the doctrine of separability, stated that,

The doctrine of separability was expounded in the judgment of Heyman v. Darwins Ltd by the House of Lords wherein it was held that English common law had been evolving towards the recognition of an arbitration clause as a separate contract which survives the termination of the main contract. (Para 3.5)

The court also highlighted the scenario where arbitration clause is not impeached,

In Harbour Assurance v. Kansa General International Insurance, the Court of Appeal held that if the arbitration clause is not directly impeached, an arbitration agreement is capable of surviving the invalidity of the contract, so that the arbitrator has the jurisdiction to determine the initial validity of the contract.

The court also took the consideration, for a claim of fraud in the inducement of the entire contract, of U.S. Supreme Court in Prima Paint Corporation vs. Flood Conklin MFG. CO., where it was stated that,

If the claim is fraud in the inducement of the arbitration clause itself an issue which goes to the 'making' of the agreement to arbitrate—the federal court may proceed to adjudicate it. (Para 3.14)

The court also stated that,

The Indian Arbitration and Conciliation Act, 1996 is based on the Model Law. Section 16 gives statutory recognition to the doctrine of separability and kompetenz – kompetenz. (Para 4)

The court, while deciding the second issue, observed that,

The legislative policy of minimal interference is enshrined in Section 5, which by a non-obstante clause prohibits judicial intervention except as specified in Part I of the Arbitration Act. A conjoint reading of Sections 5 and 16 would indicate that all civil commercial matters, including the issue as to whether the substantive contract was voidable can be resolved through arbitration. (Para 4.1)

The court backed this observation with landmark judgments - Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd, A. Ayyasamy v. Parmasivam & Ors.

The court, about the issue whether an arbitration clause in a document / agreement / conveyance which requires compulsorily to be stamped under the relevant Stamp Act, but is not duly stamped, the court highlighted the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Limited,

It was held in the case that “an arbitration clause in an agreement would not exist when it is not enforceable by law”. It was submitted that the High Court while allowing the application under Section 8, had enforced a non-existent arbitration clause, which was in violation of Section 34 of the Maharashtra Stamp Act, 1958 and the law laid down by this Court.

After comparing the law to the facts of the present case, the court observed the following,

We hold that since the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the commercial contract, would not 35 invalidate the arbitration clause, or render it un-enforceable, since it has an independent existence of its own. (Para 6.8)

The allegations made by a party that the substantive contract has been obtained by coercion, fraud, or misrepresentation has to be proved by leading evidence on the issue. These issues can certainly be adjudicated through arbitration. (Para 6.9)

The payment of Stamp Duty on the substantive contract as assessed by the Collector, would however be subject to the right of revision / appeal available under the relevant Stamp Act. (Para 7.2)

The court on the issue that, whether the fraudulent invocation of the Bank Guarantee is arbitrable or not, concluded that,

All civil or commercial disputes, either contractual or non contractual, which can be adjudicated upon by a civil court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded either expressly by statute, or by necessary implication. (Para 8.10)

The court about the maintainability of the writ petition by R1 stated that,

The writ petition is not maintainable since a statutory remedy under the amended Section 37 of the Arbitration Act is available. (Para 9.1)

The court finally concluded that,

With respect to the invocation of the Bank Guarantee, the Appellant may seek interim relief u/S. 9 of the Arbitration and Conciliation Act, 1996. (Para 11)

View/download judgement: M/s N.N. Global Mercantile Pvt. Ltd. vs. M/s Indo Unique Flame Ltd. & Others

Nishant Aryaman