Samyak Jain & Shalini Mishra
IV Year B.A. LLB (Hons.), Institute of Law Nirma University.
A three judge bench of the Supreme Court on 11 January 2021 pronounced the judgment in the case of NN Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. & Ors. (‘Global Mercantile’). It was set forth that there is no legal impediment for enforcement of the arbitration clause if the underlying contract is unstamped. Additionally, the bench differed with the positions previously laid down in cases of SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd (‘SMS Tea Estates’), Garware Wall Ropes Limited v. Coastal Marine Construction and Engineering Limited (‘Garware Wall Ropes’) and the recent judgment of Vidya Drolia v. Durga Trading Corporation (‘Vidya Drolia ’).
The court dealt with two interesting issues in the instant case, one pertaining to the validity of an arbitration agreement in an unstamped contract and the other issue was concerned with the arbitrability of allegations of fraud. The article broadly addresses the former issue pertaining to the doctrine of separability. The bench ruled that non-payment of stamp duty by Indo Unique would not render the arbitration agreement unenforceable on the ground of initial defect or irregularity.
The post critiques the Court’s position in Global Mercantile on the question of whether an arbitration agreement would be non-existent in law, invalid or unenforceable, if the underlying contract was not stamped as per the relevant Stamp Act.
Indo Unique entered into a contract with Karnataka Power Corp. Ltd for washing of coal. It entered into a subcontract termed as Work Order with Global Mercantile for the transportation of coal. In regards of this Work Order, Global Mercantile furnished a bank guarantee of Rs. 3,36,00,000 in favor of the Indo Unique. Certain disputes arose which led to the invocation of the bank guarantee. Thereafter Global Mercantile filed a civil suit before Commercial Court stating that invocation of the bank guarantee was fraudulent in nature wherein the Commercial Court then passed an ex parte order for the enforcement of the said bank guarantee. Subsequently, Indo Unique filed a suit under Section 8 of the Arbitration Act before the High Court to refer disputes to Arbitration which was rejected by the High Court. Aggrieved by the order of the High Court, Global Mercantile filed a Special Leave Petition before the Supreme Court.
The Muddy Waters of Doctrine of Separability in Indian Cases
There is an incessant dilemma surrounding the admissibility of an unstamped document and the Supreme Court has time and again delivered contradicting judgment on the same issue. The three judge bench in Global Mercantile posited that the finding in SMS Tea Estates and Garware Wall Ropes is not a correct position in law. Furthermore, the bench does not also concur with the position taken in paragraph 92 of Vidya Drolia by a coordinate bench which affirms the judgment made in Garware Wall Ropes.
The Supreme Court in SMS Tea Estates dealt with the question of whether an arbitration agreement was valid and enforceable in an unregistered and unstamped lease deed which entailed compulsory registration under the Registration Act 1908, being a part of the said lease deed which was invalid and unenforceable. The Court decided that an arbitration agreement in an unregistered instrument would be valid and enforceable but an arbitration agreement in an unstamped commercial contract is unenforceable in law and it cannot be acted upon.
In Garware Wall Ropes, the Apex Court had examined the question of stamp duty in an underlying substantive contract with an arbitration agreement. The Court reasoned that it is unfeasible to separate the arbitration clause from such agreement so as to give it an independent existence. The Garware Wall Ropes judgment has followed the judgment in SMS Tea Estates to contend that the arbitration clause would be non-existent in law, and unenforceable, till Stamp Duty is adjudicated and paid on the substantive contract. It was held that an arbitration clause in an agreement would not exist if it is unenforceable by law.
In the recent judgment of Vidya Drolia, the Supreme Court briefly discussed the issue of arbitrability of the arbitration agreement. Moreover, the Court stated that an arbitration agreement exists if it is enforceable in law and wherein it satisfies the statutory requirements of both the Arbitration Act and the Contract Act. The three judge bench in Vidya Drolia relied on the case of Garware Wall Ropes, which drew distinction between the two aforesaid terms.
A conjoint reading of SMS Tea Estates and Garware Wall Ropes shows that the Apex Court erred in finding that Maharashtra Stamp Duty Act applies to the whole contract including an arbitration clause. Further, in case of non-payment of Stamp duty in respect of the instrument, the case also invalidates the arbitration clause. The aforementioned cases considered it essential to read the whole agreement as one without bifurcating between the underlying agreement and the arbitration clause on the basis of severability principle. The argument stems from the reasoning that as per Section 49 of the Registration Act, an unregistered document can be used as evidence in collateral transaction, i.e. an arbitration clause is separable and can be used for the resolution of parties. Whereas, Section 35 of Stamp Act does not prescribe any condition similar to Section 49 of Registration Act enabling the instrument to be used as collateral transaction.
Furthermore, the Court opined that in absence of provision similar to Section 49 of the Registration Act, it is unviable to bifurcate the arbitration clause mentioned in the agreement so as to give it an independent existence. According to Section 34, unless the stamp duty is paid, the Court cannot act upon such an instrument; meaning thereby that an arbitration clause cannot be forced. It can be concluded that the arbitration clause in the main contract would be non-existent until the contract is duly stamped.
The reasoning provided in SMS Tea Estates can be considered as an erroneous position in law as it ignores the principle of severability. It is a settled civil law principle that arbitration agreement is independent of the main contract and cannot be rendered unenforceable in case of invalidity of the main contract. The view rendered by the Court in SMS Tea Estates and Garware Wall Ropes Ltd. that non-payment of stamp duty on the substantive contract would invalidate the arbitration clause is a flawed legal position and the courts should refrain from taking the anti arbitration position. It is merely a deficiency on the part of the other party which is curable on the payment of requisite stamp duty along with a penalty, if any. Moreover, Bombay High Court in Gautam Landscapes Pvt. Ltd v. Shailesh Shah followed the severability principle and correctly pointed out that arbitration agreement cannot be stalled if the main contract was not stamped.
Notably, the court in Global Mercantile adopts a pro-arbitration stance which is inconsistent with the previous judgments following the legislative intent of the Arbitration Act, 1996 by prioritizing a crucial aspect of arbitration i.e. party autonomy. It observed that an arbitration agreement in an underlying contract, whether stamped or unstamped, is distinct and independent of substantive contract. It contains the binding obligation of the parties to resolve their disputes through the mode of arbitration. The Court further added that the autonomy of the arbitration agreement is based on the twin concepts of separability and kompetenz – kompetenz.
It can be further argued that on payment of requisite stamp duty to the collector, the unstamped document would then be admitted as per proviso to Section 34. This led to the understanding that non-payment of stamp duty is a technical defect and can be rectified by paying the requisite amount. This cannot however lead to the conclusion that this should result in invalidation of arbitration clauses in the Work Order. Moreover, the Court also lays emphasis on Section 3 of the said Act which does not require an arbitration agreement to pay for the stamp duty.
The jurisprudence on invalidity of an arbitration agreement the non-payment of stamp duty has been chequered, to say for the time being. Hence, payment of stamp duty will cure the defect and will not invalidate the arbitration clause in the main agreement. Further, coordinate bench judges referred this case to a larger bench for reconsidering the position laid down in Vidya Drolia on the question of validity of arbitration agreement pending the payment of stamp duty. Global Mercantile facilitates the chief purpose of dispute resolution through arbitration without unnecessary expense or delay. The said judgment is a welcome step towards promoting arbitration for alternate dispute settlement mechanisms. There is an impounding need for the Supreme Court to settle the disputed stance on the admissibility of the arbitration clause of an unstamped document to promote pro-arbitration positions in India.