M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd.

 

Case analysis : M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd.

 

 INTRODUCTION:

The decision of the Three-Judge Bench of the Supreme Court of India in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (Global Mercantile) has undoubtedly marked the nascence of a new era of pro-arbitration jurisprudence in India. The tectonic judgment of the Supreme Court delivered on 11-1-2021 has brought India more in concinnity with the opinions of the courts in the western  world that have trailblazer International arbitration jurisprudence for decades. The present article will study the far-reaching effect of the judgment and will accentuate the manner in which the Supreme Court through its persuasive and coetaneous reasoning has discarded the stricture that obstreperous parties would weaponize to dodge their commitments in respecting legitimate discretion arrangements.

 

BACKGROUND OF THE CASE: –

Indo Unique was granted a delicate by Karnataka Power Corporation Ltd. (‘KPCL’). Along these lines, it entered a sub-contract with Global Mercantile. Under Clause 9 of the Work Order, Global Mercantile outfitted a bank ensure. Because of a conflict with KPCL, Indo Unique summoned the bank to ensure which prompted the current question.  Indo Unique documented an application under Section 8 of the (‘ACA’) act 1966 under the steady gaze of the Commercial Court to allude the debate to mediation as far as Clause 10 of the Work Order. Upon an ominous decision from the Commercial Court, Indo Unique recorded an update to the Bombay High Court (‘HC’). Worldwide Mercantile protested bury Alia because the assertion arrangement was contained in an unstamped Work Order and accordingly unenforceable under Section 34 of (‘MSA’) 1958. The HC maintained the practicality of the application while leaving the issue of unenforceability of discretion understanding and extortion to the arbitral council. Therefore, Global Mercantile was claimed before the SC.

 

FACTUAL MATRIX OF THE CASE :

 Observe the realities that prompted the debate. Respondent 1 Indo Unique (Indo Unique) was awarded a work order from the Karnataka Power Corporation Ltd. (KPCL) for washing of coal. Thereafter, in pursuance of the said work order Indo Unique furnished a bank guarantee in favour of KPCL through Respondent 2 State Bank of India (SBI). Subsequently, the Indo Unique entered into a sub-contract with the appellant Company N.N. Global Mercantile (Global Mercantile) for transportation of coal. Clause 9 of this sub-contract contained provisions for a security deposit to be furnished by Global Mercantile. Clause 10 embodied an arbitration agreement for resolution of disputes arising from the sub-contract. Accordingly, Global Mercantile furnished a bank guarantee in favour of SBI. Certain disputes arose under the principal contract that led to the invocation of the bank guarantee by KPCL. Further, Indo Unique invoked the bank guarantee furnished by Global Mercantile under the sub-contract. The invocation of the bank guarantee under the sub-contract led to a series of proceedings that stemmed from decision of the Commercial Court in Nagpur which was eventually challenged before the  Bombay High Court by way of a writ petition filed under Articles 226 and 227 of the Constitution of India. The High Court rejected the findings of the commercial court and through its judgment held that there was a valid arbitration agreement between the parties whilst allowing an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act) to be maintained. The High Court further went on to reject the contention that the alleged fraudulent invocation of the bank guarantee could not be resolved through arbitration. The High Court also held that the contention of the arbitration agreement being unenforceable as the sub-contract was unstamped could be raised at the time of filing an application under Section 11 of the Act or at any other appropriate time before the Arbitral Tribunal. Aggrieved by the decision of the  Bombay High Court, Global Mercantile preferred to exercise its constitutional remedy and filed a special leave petition before the  Supreme Court of India.

ISSUE OF THE LAW RAISED:

1.  The core issue of law raised in the Global Mercantile judgment was that 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?

 

 

JUDGEMENT OF THE CASE :

 

The Apex Court while passing its judgment has placed a heavy reliance on the doctrines of separability and adjudicating body to exercise on the issues whilst noting their importance in modern and contemporary arbitral jurisprudence. The Supreme Court relied on international arbitral jurisprudence of the global arbitration hotspots such as UK, US and France whilst reiterating the need to give effect to the essence of the 1985 UNICITRAL Model Law on which the Arbitration and Conciliation Act is based. The Court also noted the legislative intention of minimising judicial interference in the arbitration process and highlighted the rationale behind the amendment of Section 11 of the Act in 2015. Before applying the law to the facts noted some earlier eminent decisions  In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.^[1] (SMS Tea) where inter alia the Court held that an unstamped agreement cannot be acted upon to enforce an arbitration agreement contained in it. The judgment in SMS Tea propounded a dichotomy between the two aspects of an unregistered and an unstamped agreement. The Court in SMS Tea while succinctly applying the doctrine of separability to the aspect of non-registration held that the non-registration of an agreement would not affect the unenforceability of the arbitration agreement contained in it. However, with regard to the aspect of non-payment of stamp duty the Court held that the strict and mandatory provisions of the Stamp Act could not be read harmoniously with the relevant provisions of the Arbitration and Conciliation Act. It is pertinent to note here that the judgment in SMS Tea  was passed before the 2016 Amendment of Section 11 of the Act and the law as it stood then was based on the decision of the Constitutional Bench in SBP & Co. v. Patel Engg. Ltd.^[2] and National Insurance Co. Ltd.v. Boghara Polyfab (P) Ltd.^[3] where at the pre-reference stage under Section 11(6) of the Act certain threshold issues could be examined by the Court.   The Court in Global Mercantile while went on to note the importance of minimising judicial intervention at the pre-reference stage after the amendment of Section 11 of the Act and corresponding legislative overruling of Patel Engg. found itself at odds with another judgment of the same court which was interestingly passed after the addition of sub-section (6-A) to Section 11. In Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.^[4] (Garware) the Court delivered a judgment placing heavy reliance on the ratio laid by Raveendran, J. in SMS Tea. The two-Judge Bench although employing a slightly different hypothesis came to the same conclusion as in SMS Tea. The Court in Garware went on to state that an arbitration clause in a contract would be enforceable only if the contract was enforceable in law. Further it went on to state that a contract would become enforceable only if it is duly stamped. The Court held that therefore on a conjoint reading of the relevant provisions of the Stamp Act, Contract Act and Arbitration and Conciliation Act determined that an unstamped agreement could not be enforced by law. It appears that the Court in Garware  has failed to recognise the rationale behind the fiction of separability and has wrongly tied the fate of the arbitration agreement to the substantive contract. Coming back to the Global Mercantile, after studying the current position on law as it stood, the Court went on to deliver an opinion to the contrary. The Court held that the non-payment of stamp duty on the substantive commercial contract would not render the arbitration agreement contained in it as unenforceable or invalid. The Court went on to reason by adopting a harmonious construction between the mandatory provisions of the relevant Stamp Act and its duty to enforce arbitration agreements. The Court relied extensively on the doctrine of separability, filling in the inadequacy of Court’s ratio in Garware. The Court also noted that the non-payment or deficiency under the Stamp Act was a curable defect and therefore there was no need to stay arbitration until stamp duty is paid. Accordingly, the Court overruled the position in SMS Tea on this issue. The Court also expressed dissent with the findings in Garware. The Court noted that the position in Garware was recently affirmed by the judgment of a coordinate Bench in Vidya Drolia v. Durga Trading Corpn^[5] The Court noting that it could not hold the position laid down in Garware  as per incuriam referred this question to be determined by a Constitutional Bench of 5 Judges. In addition to this, the Court in Global Mercantile  laid down clear and simple guidelines as to the method in which the unstamped instrument is to be dealt with at the  time of appointment of Arbitrator. Interestingly, the Court distinguished the purpose of Section 11 from Section 9 and laid down that in case of an application filed under Section 9 of the Act praying for urgent ad interim reliefs, the Court would first have to grant ad interim relief to safeguard the subject-matter of the arbitration and then impound the instrument for payment of requisite stamp duty.  Moving on to the second issue of whether the allegation of the fraudulent invocation of the bank guarantee was arbitrable, the Court relied upon various judgments of its own and stated that the earlier notions which courts harboured to hold fraud as non-arbitrable were wholly archaic and obsolete. The Court discarded these apprehensions that were commonly predicated on assessment of voluminous evidence, lack of expertise of arbitrators, inadequacies of arbitral regime and the misconceived notions of domestic public policy and thereby held fraud as arbitrable. 

 

 

Conclusion

 

In a nutshell, The approach adopted by the Indian Supreme Court in Global Mercantile[  has been long awaited by the arbitration community in India. The Supreme Court has adopted a holistic, well-balanced and a contemporary approach in discarding the long persisting apprehensions of the Indian courts that provoked them to unduly interfere in arbitration proceedings. This judgment has put to rest many dilatory tactics that recalcitrant parties often used to evade their obligation to honour valid arbitration agreements. The sole intent of this Act is to safeguard the “Equitable Rights” of the parties and not forcing the parties to knock the doors of litigation or taking litigation as an alternative remedial mechanism which in no way will serve the true intent of the Arbitration Act and the parties will be forced to suffer the agony. This judgment has minimised undue judicial interference which often occurred at the time of applications made under Sections 8, 9 and 11 of the Act and has thereby improved the overall efficacy of the arbitration process for the Indian business community. It is my opinion that the judgment of the Court has met an international benchmark and has improved the prospect of India becoming a favourable seat for international commercial arbitrations in the near future.

 

     PRECEDENTS:

1.     SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd .JULY 20, 2011

2.     SBP & Co. v. Patel Engg. Ltd. October 26 , 2005

3.     National Insurance Co. Ltd.v. Boghara Polyfab (P) Ltd, September 18 , 2008

4.     Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd, April 10, 2019

5.     Vidya Drolia v. Durga Trading Corpn, December 14, 2020

 

 

 

 

ENDNOTES:

1.     https://indiankanoon.org/doc/39641512/

2.     https://blog.ipleaders.in/case-analysis-m-s-n-n-global-mercantile-v-m-s-indo-unique-flame-ltd/

3.     https://main.sci.gov.in/supremecourt/2020/23926/23926_2020_38_1502_25365_Judgement_11-Jan-2021.pdf