NN Global Mercantile Private Limited v Indo Unique Flame Limited and others

18th March, 2024 - 9:23 am Categories: Legal Issues 0 Comments

CITATION: – [2023] 7 SCC 1.
BENCH: – 5 Judges Bench, JJ. K.M. Joseph, JJ. Ajay Rastogi, JJ. Aniruddha Bose, JJ. Hrishikesh Roy and JJ. C.T. Ravikumar

BACKGROUND OF THE CASE: –

The company known as Indo Unique (hence referred to as “Respondent 1”) has been officially granted a task by the KPCL for the specific work of coal washing. Following the aforementioned task, the company Indo Unique (further referred as IU) proceeded to furnish a bank assurance to KPCL by means of party 2 to the case, SBI. Afterward, IU engaged in a subsidiary contractual agreement with the Company which is appellant N.N. Global Mercantile (hereinafter referred to as Global Mercantile) with the objective of facilitating the conveyance of coal. According to Provision 9 of the subsidiary agreement, it is mandated that Global Mercantile must furnish a security deposit. Provision 10 encompasses an arbitration arrangement which resolution is regulated by, of any potential disagreements rising from the subsidiary agreement. G.M. has issued a bank assurance in favor of SBI, as stipulated by the agreement. The main contract gave rise to difficulties, leading to KPCL’s subsequent invocation of the bank guarantee. Furthermore, Indo Unique has chosen to use its prerogative to make use of the bank guarantee offered by Global Mercantile in accordance with the stipulations outlined in the subsidiary agreement. The supplication of the bank assurance was carried out in accordance with the stipulations outlined in the sub-contract, leading to a series of judicial processes. The genesis of these actions can be traced back to a judgment rendered by the Commercial Court in Nagpur. Following the events, the determination was challenged in the High Court of Bombay by means of a writ petition present under A. 226 and 227 of the Indian Constitution. The Court of law has ruled against the conclusions of the specialized court for commercial law and, in its ruling, determined that there exists a legally binding agreement of arbitration among the party to contract and held that based on the principle of separability, the agreement of arbitration is considered a discrete and different pact from the original contract[1]. As a result, the arbitration agreement remains valid and enforceable regardless of the admissibility or enforceability of the substantive contract due to reasons such as non-payment of stamp duty. But in case of Vidya Drolia v Durga Trading Corporation[2], contrary opinion was given. Furthermore, the court has granted permission for the continuation of an application according to Section 8 of the Arbitration and Conciliation Act, 1996 (furthermore mentioned to as “the Act”). The Court of law, in addition, rejected the argument that the suspected deceitful utilization of the bank assurance might not be handled via clause of arbitration. The law Court additionally ascertained that the argument concerning the unenforceability of the agreement of arbitration on account of the absence of stamping on the subsidiary contract might be elevated during the presentation of an applicability as per provision 11 of the law or at any other suitable juncture preceding the Tribunal of arbitration. Global Mercantile, dissatisfied with the verdict rendered by the Court of Bombay, has elected to exercise its legitimate prerogative by submitting to the Apex Court of India an Special Leave Petition[3]

ISSUES OF THE CASE: –

1. In the event that the contract in question contains an unstamped instrument but includes a stamped arbitration clause, whether the court has the authority to disregard the absence of stamp duty on the instrument within the contract?

RULES: –

1. Section 8 of the Arbitration and Conciliation Act, 1996
2. Section 11 of the Arbitration and Conciliation Act, 1996
3. Section 7 of the Arbitration and Conciliation Act, 1996
4. Section 9 of the Arbitration and Conciliation Act, 1996
5. Section 16 of the Arbitration and Conciliation Act, 1996
6. Section 35 of the Stamp Act, 1899
7. Section 33 of the Stamp Act, 1899

CONTENTIONS MADE BY THE APPELLANT: –

There was a contention made against the provision outlined in Section 35 of the Stamp Act[4], which asserted that an instrument lacking proper stamping would be prohibited from being admitted as evidence in a court of law, regardless of the intended purpose. Moreover, a court would be unable to act based on such a document. The existence of an arbitration agreement, regardless of its inclusion in a provision, a order of work, or any other contract of commercial, cannot be considered as a distinct entity. The misinterpretation of the concept of arbitration as a distinct and independent entity has occurred inside the framework of provision 33 and 35 of the Stamp Act. The counsel referred to the judgments of SMS Teas Estates[5], Garware[6], and Vidya Drolia[7] wherein, it was determined that Section 16[8] would only be fully applicable if the arbitrator was selected deprived of any involvement from the Court of law. It has been argued that even in an applicability made as per provision 11 of the Act[9], the Court of law is obligated to adhere to the legal requirements outlined in Sections 33 and 35 of the Stamp Act[10].

CONTENTIONS MADE BY THE RESPONDENT: –

The respondent contended that the duty to resonance with provision 33 and 35 of the Stamp Act would continue to be relevant, even in a petition submitted as per provision 9 of the Act. The provisions outlined in the Stamp Act, specifically A. 5 of Schedule I to the Maharashtra Stamp Act of 1958, do not impact the presence and/or validity of an arbitration agreement. The failure to pay stamp duty can be remedied. There is an alternative viewpoint suggesting that a thorough analysis of section 11(6-A) implies that the obligation to confiscate an non-stamped or inadequately stamped documents rest with the arbitrator appointed under section 11, rather than the judge. The attorney in question referred to the legal precedent set by the Hindustan Steel Ltd. v Dilip Construction Co. case[11]. It was argued that an non-stamped document can be enforced, provided that the necessary duty and penalty are paid. The counsel referred to the Lachmi case[12], in which it was established that an instrument lacking a stamp, but with the corresponding penalty paid, was deemed legally valid. Consequently, the absence of a stamp on a document did not have an impact on the document’s legitimacy. The paper was rendered inadmissible as evidence. The council places its emphasis on Section 5 of the legislation[13], which prohibits judicial interference. Following the modification of 2015, it was observed that provision 8 of the Act allows for the possibility of disallowing any reference to arbitration, if it can be established prima facie that a lawful agreement of arbitration does not occur.

DOCTRINES MENTIONED BY THE RESPONDENTS: –

Doctrine of Severability

The notion that an agreement of arbitration is a separate and independent pact, distinct from the underlying contract of commercial law in which it is included, is widely recognized in the realm of international arbitration law. The principle of severability or separability of the agreement of arbitration pertains to the notion that the arbitration agreement retains its validity and enforceability in the event that the underlying contract is determined to be flawed, ineffective, or terminated.

Doctrine of Kompetenz-Kompetenz

According to this doctrine, the power is with Tribunal to govern in addition render decisions regarding its personal dominion. This includes addressing matters related to the legitimacy, legality, and space of the agreement of arbitration. The principle has progressed over period with the aim of reducing court intervention during the pre-reference stage and minimizing the number of baseless challenges against the jurisdiction of the Tribunal of Arbitral.

RATIO

The court of law, in its ruling, determined that an arbitration agreement lacking both stamping and registration is not legally acceptable, based on its analysis of relevant case laws and provisions. A document or agreement that lacks the required stamp duty and potentially includes an arbitration clause cannot be considered legally enforceable. Hence, it can be argued that the contract, along with the arbitration agreement contained within it, does not possess legal validity.

ANALYSIS: –
MAJORITY OPINION: –

The majority of judges reiterated the relevant provisions of various laws, such as the Arbitration Act and the Stamp Act, among others. The Apex Court of law made reference to the pronouncement in the case of Hindustan Steel Ltd. v. Dilip Construction Co.[14] in order to extract the general regulation regarding the stamping of instruments. The court determined that the Stamp Act is a financial measure intended to be enforced vigorously, and its strict rules are designed to generate in addition safeguard returns. It is the responsibility of a court to prioritize the interpretation of the law that ensures its enforcement, rather than permitting the law to be disregarded without consequences. The Stamp Act is not meant to be utilized as a tool by a party involved in a legal dispute to undermine the opposing party’s case. However, it is important to note that a document can only be considered admissible evidence if it has been properly endorsed in resonance with provision 42(2) of the Stamp Act.[15] It has been noted that an instrument without a stamp is accountable to be confiscated as per provision 33 of the Stamp Act. The instrument will only be endorsed and considered enforceable in accordance with the law once the penalty has been paid. As per provision 35 of the Stamp Act, the parliament has explicitly prohibited the acceptance of any instrument that is either unstamped or inadequately stamped as admissible evidence for any purpose. In order to provide further clarification, it is important to note that documents that have not been appropriately stamped or do not possess adequate postage could not be deem as valid evidentiary for any intended determination.

The judges stated their opinion that the conclusions drawn in the case of N.N. Global I[16] about the ruling in SMS Tea Estates[17] are not in accordance with the accurate legal principles. The courts noted that the contention that an agreement of arbitration, being a distinct agreement, would be legal even if the underlying contract is not properly stamped or lacks sufficient stamping, without any substantive merit. The arbitration agreement, as a standalone instrument, is subject to stamp duty. Hence, the underlying assertion in N.N. Global I that the arbitration agreement is not subject to obligation and possesses an independent existence is untenable. In this context, mentioned Article 5 of the Stamp Act. The Court of law proceeded to provide further clarification that parties can engage in transactions with unstamped documents. This includes the transfer of goods or services through such instruments, even if they are still subject to the requirement of stamp duty. What is pertinent, however, is that the government will not provide additional safeguards through suitable penalties. The rights that would have been accessible had the instrument been duly stamped will be rendered non-existent.

The court proceeded to provide more clarification that an agreement lacking a stamp is not legally enforceable and does not meet the criteria for being considered an agreement as per provision 2(h) of the Contract Act, 1872[18]. Therefore, the Court of law expressed the opinion that it may not be appropriate to simply characterize an arbitration agreement without a stamp as a “curable defect.” An arbitration agreement that has not been stamped cannot be recognized or considered for any other purpose, as specified in provision 35 of the Stamp Act. The court ruled that the interpretation of provision 11(6-A) of the Arbitration Act[19] should not be limited to a literal understanding of an agreement of arbitration being “existing,” but rather should be read in terms of its legal existence. The Court expressed its opinion that the judgements made in SMS Tea Estates[20] and Garware[21], as endorsed in the discoveries of Vidya Drolia[22], are accurate. The Apex Court has provided additional clarification that it is not permissible to send a dispute to arbitration and delegate the question of impounding solely based on the first appearance determination on the existence of an agreement of arbitration. Any failure or refusal to fulfill the legal obligation outlined in Section 11 would be indefensible.

MINORITY OPINION

Justices Ajay Rastogi and Hrishikesh Roy concurred that the court had the option to refrain from scrutinizing the stamp duty during the pre-referral stage. They argued that deciding on the stamp duty at the beginning would contribute to procedural intricacies and result in unwarranted delays in court proceedings. Moreover, it has been observed that the matter of stamping is a remediable flaw in line with the provisions of the Stamp Act. Consequently, this flaw did not extract the agreement of arbitration null and void or not being able to be enforced.

Justice Hrishikesh Roy, in expressing his dissent, argued that in the context of arbitration, the principle of party autonomy should be upheld, and courts should exercise restraint in their interference, adhering to the terms of the relevant legislation. The individual additionally asserted that Section 11(6) of the Act[23] specifies that arbitrators shall be appointed only in situations where the party of the agreement are unable to agree on a mutual term on the selection of an arbitrator or if they fail to select an arbitrator as specified in the agreement of arbitration. This provision consequently restricts the extent of judicial involvement when issuing an administrative order that does not possess the characteristics of a judicial order.

The minority argued that in accordance with Section 16 of the Act, all disputed matters should be brought before an arbitrator(s) for resolution. This provision grants the arbitrator(s) the authority to determine the existence and enforceability of the arbitration agreement, including the assessment of stamp duty as required by the Act. Hence, the presence of a minority perspective serves to mitigate excessive time constraints during the commencement of legal proceedings.

IMPLICATIONS

The author asserts that the decision rendered in this judgment is deficient in terms of rules that would enable the courts to abstain from conducting a miniature trial to ascertain the adequacy of stamping before referring the subject to arbitration. The Supreme Court has issued a ruling stating that in situations where a claim regarding insufficient stamping is found to be without merit, it is acceptable to mention the disagreement to arbitration. This allows the Arbitral Tribunal to exercise its authorities under the Stamp Act, if deemed essential.

Although the majority opinion of the Supreme Court does not seem to favor the notion that the resolution of stamp duty sufficiency is a lengthy process, there is a lack of explicit guidance regarding the necessary actions that parties must take if they intend to pursue immediate interim remedies or emergency judgments. It is necessary for the parties to initially determine the adequacy of the stamping before proceeding with the presentation of arguments regarding the requested urgent reliefs or emergency awards. International business arbitrations present a particularly formidable challenge in this regard.

The ruling seems to provide an opportunity for unethical litigants to discover another means to present unjustified challenges, so derailing the arbitration process. The verdict seems to lack the necessary guidance on this element. The inclusion of the stamping problem before the courts before resorting to arbitration would inevitably result in an increase in both the duration and expenses incurred by the disputing parties. The main goal of the Arbitration Act was to resonate with the recognized international standards of arbitration, as demonstrated by the evolution of the Model Regulation. Furthermore, the Act aimed to establish a reliable and effective mechanism for the resolution of disputes, offering the possibility of expedited resolution. However, the verdict appears to diverge from its initial intentions and commitments by implementing a preliminary trial during the prior-reference phase to evaluate the adequacy of the stamping.

CONCLUSION

In order for India to maintain its positive progress in the ease of doing business rankings and establish itself as a prominent global hub for arbitration, it is crucial to address the challenges that have emerged as a consequence of the ruling in this specific case. In order to preserve the integrity and effectiveness of the Arbitration Act, it is advisable to implement suitable measures that prevent any interference with its overarching scope, purpose, and ethos resulting from the interaction between an arbitration agreement and the stamping requirements. The current scenario presents a suitable opportunity for the legislative body to propose necessary revisions to the Stamp Act pertaining to agreements for arbitration. By foregoing the potential revenue derived from the imposition of fees on arbitration agreements, a significant percentage of the state’s treasury funds could be preserved, so mitigating the burden of excessive court litigation that may arise in the aftermath of the pandemic.

Author: Manisha Sharma, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Para 29.

[2] [2021] 2 SCC 1.

[3] NN Global Mercantile Private Limited v Indo Unique Flame Limited and others, [2023] 7 SCC 1.

[4] The Indian Stamp Act, 1899, s.35.

[5] SMS Tea Estates (P) Ltd. v Chandmari Tea Co. (P) Ltd., [2011] 14 SCC 66.

[6] Garware Wall Ropes Ltd. v Coastal Marine Constructions & Engg. Ltd. [2019] 9 SCC 209.

[7] Vidya Drolia v Durga Trading Corpn., [2021] 2 SCC 1.

[8] The Arbitration and Conciliation Act, 1996, s.16.

[9] The Arbitration and Conciliation Act, 1996, s.11.

[10] Ibid (3), s.33.

[11] Hindustan Steel Ltd. v Dilip Construction Co., [1969] 1 SCC 597

[12] Lachmi Narayan Agarwalla v Braja Mohan Singh, 1924 SCC OnLine PC 34.

[13] The Arbitration and Conciliation Act, 1996, s.5.

[14] Ibid (10).

[15] The Indian Stamp Act, 1899, s.42(2).

[16] NN. Global Mercantile Private Limited v Indo Unique Flame Limited and ors., [2021] 4 SCC 379.

[17] Ibid (10).

[18] The Indian Contract Act, 1872, s2(h).

[19] The Arbitration and Conciliation Act, 1996, s.11(6-A).

[20] Ibid (4)

[21] Ibid (5)

[22] Ibid (6)

[23] The Arbitration and Conciliation Act, 1996, s.11(6).