Author: Richard Ekka, 4th year student at Rajiv Gandhi National University of Law, Patiala.
Citation: 2021 SCC OnLine SC 13
Date of decision: 1st January 2021.
Bench: Honorable Justice Indu Malhotra.
Original Copy: View
Statutes Involved: Section 35 of the Indian Stamp Act, 1899.
Issues in question:
- Whether an arbitration agreement is enforceable in the present agreement as which is unstamped under the stamp act?
- Whether the fraudulent invocation of the bank guarantee is capable of settlement under the arbitration clause.
Background/Facts of the case:
- Indo unique was awarded a work order for washing of coal from Karnataka Power Corporation Ltd. Indo unique then furnished a Bank Guarantee in favor of KPCL through SBI.
- Indo Unique subsequently entered a subcontract with N.N. Global Mercantile for the transportation of the coal to the plant. Under the subcontract in subclause 9 it contained that Global Mercantile are to make a security deposit, the next clause it was made out that any dispute is to be solved by way of arbitration, so Global Mercantile furnished a bank guarantee in favor of SBI.
- Certain disputes arose under the main contract and Indo Unique invoked the bank guarantee furnished by Global Mercantile under the subcontract. This invocation led several proceedings by the decision of the Commercial court till it was challenged by filing a writ petition under article 226 and 227 of the constitution to the Bombay High Court.
- The high court held that the arbitration agreement was valid between the parties and held that the application was filed under section 8 of the Arbitration and Conciliation Act, 1996. The court also held that the fraudulent invocation of the bank guarantee could not be solved by way of arbitration, further the court held that the subcontract is unenforceable as it was unstamped.
- Global mercantile then exercised their constitutional remedy and went on to file a special leave petition in the Supreme court.
- The court in delivering the judgement relied heavily on the doctrines of separability and Kompetenz-Kompetenz. It relied on international arbitration jurisprudence from UK, US and France also emphasizing on the importance of the modern contemporary arbitral jurisprudence, the court also held the importance of the need of UNCITRAL model of law on which the Act is based on.
- The court applied the precedent of the case of SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd, the court held that an unstamped agreement could not enforce an arbitration agreement, the court dichotomized unregistered and unstamped agreement, while applying the doctrine of separability held that non-registration does not affect the unenforceability of the agreement. Regarding the non-payment of the stamp, it was held that the mandatory provision of the stamp act could not be read harmoniously with the Arbitrations and Conciliation Act. It is important to note that the judgement was passed on the amendment made in section 11 of the act in the cases of SBP & Co. v. Patel Engg. Ltd. And National Insurance Co. Ltd. Boghara Polyfab (P) Ltd.
- The court in the case went on to emphasize the importance of minimizing judicial intervention during the pre-reference stage as held under the SBP & Co. v. Patel Engg. Ltd. In the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd. The judgement relied heavily on the case of SMS tea, though employing a different hypothesis they came to the same conclusion, the court also held that the arbitration clause will only be enforceable if the contract is enforceable in law and that it could be enforced if it is duly stamped. The court said while reading the relevant provisions from the stamp act, contract act and the arbitration and conciliation act it can be concluded that an unstamped agreement cannot be enforced.
- The court studied the current position of the law and delivered a contrary judgement in Global Mercantile, it was held that non payment of stamp duty does not render that arbitration agreement void or invalid, the court constructed a harmonious pathway between the provision of the stamp act and the arbitration agreement, with reference to non-payment of the stamp duty the court held it to be a curable defect, and no need to stay the arbitration until it is paid, the court also overruled the position of law that was laid down in the SMS tea case. The position laid down in the Garware case was affirmed in the case of Vidya Drolia v. Durga Trading Corpn. which could not sustain the position laid in the Garware case as per the present case, the 5 Judge bench laid down simple and clear guidelines for in cases where unstamped instruments are dealt while appointing an arbitrator. The court further distinguished the purpose contained in section 11 and section 9, where in under section 9 it was laid down that a case filed under this section be granted ad Interim relief to safeguard the subject-matter and then later subsequently impound the instrument for payment of the duty for the stamp.
- The court in the issue of fraudulent invocation of Bank guarantee relied on its own decisions, the court stated that the earlier notions the court held regarding maintaining fraud as a non-arbitral are obsolete, the inadequacies of the arbitral regime of domestic policy held fraud as arbitrable.
This favorable judgement comes after a long period of time in arbitration. The court has taken a well-balanced approach in discarding long overdue troubles that were provoked by the Indian courts to interfere in such proceedings, thereby laying to bed these issues. The judgement delivered by the court has given a cogent reasoning to understand the true meaning of separability and kompetenz-kompetenz safeguarding valid arbitration agreements. The semantics of arbitration have been corrected in arbitration and hence making the arbitral tribunal to deal with issues such as these. Undue judicial interference has been minimized and has set an international benchmark and a place for India in International Commercial Arbitration in the coming years, with this it now completely conforms with and upholds the UNCITRAL model law and honor the commitment under the 1958 New York Convention. This has instilled confidence in the minds of international business players and the community.