[This guest post is authored by Abhinav Gupta who is in his second year at West Bengal National University of Juridical Sciences, Kolkata]
A 3-judge bench of the Supreme Court (‘SC’) recently delivered its judgement in N. N. Global Mercantile v. Indo Unique Flame. This piece attempts to provide a critical analysis of the said judgment.
Background of Dispute
Indo Unique was awarded a tender by Karnataka Power Corporation Ltd. (‘KPCL’). Subsequently, it entered into a sub-contract with Global Mercantile. Pursuant to Clause 9 of the Work Order, Global Mercantile furnished a bank guarantee. Due to a disagreement with KPCL, Indo Unique invoked the bank guarantee which led to the current dispute.
Indo Unique filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, (‘ACA’) before the Commercial Court to refer the dispute to arbitration in terms of Clause 10 of the Work Order. Upon an unfavourable ruling from the Commercial Court, Indo Unique filed a revision to the Bombay High Court (‘HC’). Global Mercantile objected inter alia on the grounds that the arbitration agreement was contained in an unstamped Work Order and therefore unenforceable under Section 34 of Maharashtra Stamp Act, 1958 (‘MSA’). The HC upheld the maintainability of the application while leaving the issue of unenforceability of arbitration agreement and fraud to the arbitral tribunal. Consequently, Global Mercantile appealed before the SC.
The SC’s decision and Comments
Interpretation of ‘existence’ under Section 11(6-A) of ACA
Section 11(6A) was inserted by the 2015 Amendment to ACA and provides that while appointing arbitrators, the courts shall confine the examination to the ‘existence’ of arbitration agreements. The court in Garware Wall Ropes v. Coastal Marine Constructions and Engineering (‘Garware’) had held that ‘existence’ and ‘validity’ of an arbitration agreement are intertwined concepts and non-satisfaction of mandatory legal requirements shall render the arbitration agreement invalid, implying there is no agreement. This view was upheld in Vidya Drolia v. Durga Trading (‘Vidya Drolia’). However, in the present case, the SC disagreed with this view. It held that ‘existence’ under Section 11(6-A) meant merely seeing whether the agreement contains an arbitration clause. All other preliminary issues are to be decided by the tribunal in light of Section 16 of ACA which enshrines the kompetenz-kompetenz principle.
This issue has witnessed many contradicting judgments. Before the 2015 Amendment, in SBP & Co. v. Patel Engineering (‘SBP’), the court differentiated between judicial (involving judgment) and administrative (mere managing) powers. It held that the courts exercise judicial powers and broadened the scope of authority exercised by the courts. After the 2015 Amendment, the SC in Duro Felguera v. Gangavaram Port (‘Duro’) interpreted the newly inserted Section 11(6A) and opined that courts are only required to identify the existence of the arbitration agreement, and should refer all other issues to arbitration. This approach was upheld in Mayavati Trading v. Pradyuat Deb Burman. However, in Oriental Insurance Company v. Nabheram Power and Steel and United India Insurance Company v. Hyundai Engineering and Construction Company the SC took a contrary view, in line with its findings in SBP.
In the present case, the SC validated the position in Duro by adopting an ‘administrative power’ approach in furtherance to the doctrines of kompetenz-kompetenz and severability. This position also appears to be consistent with Section 5 of the ACA. The court also restricted the rights of parties to object under Section 11(6A). However, since the SC disagreed with the earlier three judge bench decision in Vidya Droila, it has now referred this issue to a 5-judge bench.
This discussion may be inconsequential in light of the 2019 Amendment to ACA. This Amendment repeals Section 11(6A) and replaces courts with Arbitral Institutions in matters regarding appointment of arbitrators. However, the amendment with respect to Section 11(6A) is yet to be notified, and therefore, the provision still stands.
Enforceability and validity of an arbitration agreement in an unstamped document
Section 34 of MSA provides that an instrument shall not be received as evidence unless it is stamped. The court delved into SMS Tea Estates v. Chandmari Tea (‘SMS Tea’) which dealt with two issues: (1) whether arbitration agreements in unregistered documents are valid; and, (2) whether arbitration agreements in unstamped documents are valid. On the first issue, the court held that arbitration agreement does not require registration in light of the proviso to Section 49 of Registration Act, 1908 (‘RA’). The court based on the doctrine of severability held that the agreement being independent of the main contract is valid. However, on the second issue, the court reasoned that Section 35 of Stamp Act does not provide a similar provision and therefore, arbitration agreements cannot be enforced in unstamped documents.
In the present case, the SC observed that an arbitration agreement is not included in Schedule-1 of MSA which provides lists of instruments that have to be stamped. It opined stamp duties as a mere fiscal measure to secure revenue. Based on severability, it held that an arbitration agreement is distinct from a commercial agreement and would survive independently from the main contract. Hence, if the main contract is unstamped, it will not render the arbitration agreement as unenforceable. However, it held that the adjudication of the substantive rights and obligations could not proceed till the provisions of the Stamp Act were complied with.
The observations in the instant case prevent parties from raising technical objections and stalling the appointment of arbitrators to merely delay arbitration. The court explicitly overrules the findings in Garware and SMS Tea. It also strikes a fine balance between the collection of revenue and holding parties to their contractual bargain.
Arbitrability of voidable and void contracts
The court also expressed some important views regarding arbitrability of void and voidable agreements. In SMS Tea, the court had held that an arbitration agreement is voidable at the option of a party and therefore the court has the power to adjudicate on the same.
Per contra, the court in the present case relied on the reasoning in Swiss Timing v. Commonwealth Games Organising Committee (‘Swiss Timing’) and held that issues regarding a contract being void or voidable can be referred to arbitration. It stated that allegations made by parties regarding the contract being ‘voidable’ are proved through evidence which can be accessed by arbitrators. Further, only when the court is satisfied that the contract is ‘void’ upon reading the contract without any additional evidence, can it refuse to refer the parties to arbitration.
It is relevant to note that Swiss Timing is the decision of a single bench and lacks precedential value. Regardless, the court chose to rely on the said reasoning on the finding that it had been affirmed in Avitel Post Tudioz v. HSBC PI Holdings (‘Avitel’). However, this appears to be incorrect as in Avitel the court recognised the lack of precedence and only adopted the reasoning of Swiss Timing with respect to the importance of Sections 5 and 6 of ACA. It did not delve into the arbitrability of void and voidable agreements. Thus, it restricted itself to a specific point of law – unrelated to the present case. Therefore, the present judgment suffers from this infirmity of upholding the decision in Swiss Timing. Regardless, this is a significant development since it reduces the interference of courts and strengthens the principle of kompetenz-kompetenz.
Arbitrability of fraud
In the present case, the SC held the position in N Radhakrishnan v. Maestro Engineers (‘Radhakrishnan’) to be out-dated. It held that in today’s arbitration practice, arbitrators are accustomed to dealing with large volumes of evidence. Hence the test of arbitrability basis the volume of evidence was held to be wholly archaic and discarded.
Although finding place in other landmark judgments, test of volume of evidence was not overruled or discussed in Avitel. In the present case, the court did away with this test to determine arbitrability. It thereby recognises that in this regard arbitrators may be as competent as civil judges.
Indubitably, Global Mercantile furthers the pro-arbitration approach in India. The court has restricted its jurisdiction to merely examining the existence of the arbitration agreement under Section 11(6A) of the ASA. It has also prevented parties from raising technical objections on the grounds of unstamped documents.
Further, the court has reinforced the competence of the arbitral tribunal to determine issues with respect to the voidable and void nature of the contracts as well as cases of fraud. With respect to the arbitrability of fraud, the court has also done away with the test based on the volume of evidence. This further boosts the autonomy of the arbitrators and establishes them as competent as other judicial officers in handling complex disputes.