# M/s. N.N. GLOBAL MERCANTILE PVT. LTD v. M/s. INDO UNIQUE FLAME LTD. & OTHERS

- **Citation:** [2021] 4 S.C.R. 933
- **Court:** Supreme Court of India
- **Decided:** 2021-01-11
- **Bench:** Dr Dhananjaya Y Chandrachud, Indu Malhotra, Indira Banerjee
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-n-n-global-mercantile-pvt-ltd-v-m-s-indo-unique-flame-ltd-others-35271
- **Pages:** 63

## Headnote

Arbitration and Conciliation Act, 1996 - ss. 8, 11 and 37 -
Maharashtra Stamp Act, 1958 - ss. 30, 32A, 33, 34, 35, 36, 37, 41
and 58 - Commercial Courts Act, 2015 - s.13(1A) - Respondent
no.1 furnished bank guarantee for Rs.29.29 crores in favour of
KPCL, in pursuance of the work order awarded to it by KPCL for
work of washing of coal - Subsequently, respondent no.1 entered
into a sub-contract/work order dated 28.09.2015 (with arbitration
clause) with the appellant company for transportation of coal from
its washery - Appellant company also furnished bank guarantee of
Rs.3,36,00,000/- in favour of the banker of the respondent no.1 -
Dispute arose between KPCL and respondent no.1, which led to
invocation of the bank guarantee by KPCL - In turn, respondent
no.1 invoked the bank guarantee furnished by the appellant
company - Appellant filed a civil commercial suit against the
respondent no.1 for a declaration that respondent no.1 was not
entitled to encash the bank guarantee as the work order was not
acted upon - It was also alleged that invocation of bank guarantee
was fraudulent - The Commercial Court directed to maintain statusquo - Respondent no.1 filed an application u/s.8 of the 1996 Act
seeking reference to arbitration - Application rejected by the
Commercial Court - It held that the arbitration clause in the work
order dated 28.09.2015 was not a general arbitration clause, which
would cover bank guarantee - Bank guarantee was an independent
contract - Writ petition by respondent no.1 - The High Court held
that application u/s. 8 of the 1996 Act was maintainable and disputes
could be resolved through arbitration - It also held that the filing
of suit before the Commercial Court was not justified - Issues arised
for consideration before the Supreme Court were: (i) Whether an
arbitration agreement would be enforceable and acted upon, even
if the work order dated 28.09.2015 is unstamped and un-
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enforceable under the Stamp Act; (ii) Whether allegation of the
fraudulent invocation of bank guarantee is an arbitrable dispute;
(iii) Whether writ petition was maintainable to challenge an order
rejecting an application for reference to arbitration u/s.8 of the
1996 Act - Held: Non-payment or deficiency of Stamp duty on the
work order does not invalidate the main contract - The arbitration
agreement contained in the work order is independent and distinct
from the underlying commercial contract - s.3 of the Maharashtra
Stamp Act does not subject an arbitration agreement to payment of
Stamp Duty - On the basis of the doctrine of separability, the
arbitration agreement being a separate and distinct agreement from
the underlying commercial contract, would survive independent of
the substantive contract - The arbitration agreement would not be
rendered invalid, un-enforceable or non-existent, even if the
substantive contract is not admissible in evidence, or cannot be
acted upon on account of non-payment of Stamp Duty - The civil
aspect of fraud is considered arbitrable - The criminal aspect of
fraud, forgery, or fabrication, which would be visited with penal
consequences and criminal sanctions can be adjusted by a Court
of law, since it may result in conviction, which is in the realm of
public law - In the instant case, the allegation of fraud with respect
to the invocation of the bank guarantee are arbitrable, since it arises
out of the disputes between the parties inter se and is not in realm of
public law - The writ petition filed by the respondent no.1 was not
maintanable, since a statutory remedy under the amended s.37 of
the 1996 Act is available.
Arbitration - Arbitration agreement - Held: An arbitration
agreement is a distinct and separate agreement, which is independent
from the substantive commercial contract in which it is embedded -
This is based on the premise that when parties enter into a commercial
contract containing an arbitration clause, they are entering into

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[2021] 4 S.C.R. 933
933
M/s. N.N. GLOBAL MERCANTILE PVT. LTD.
v.
M/s. INDO UNIQUE FLAME LTD. & OTHERS
(Civil Appeal Nos. 3802-3803/2020)
JANUARY 11, 2021
[DR DHANANJAYA Y CHANDRACHUD,
INDU MALHOTRA AND INDIRA BANERJEE, JJ.]
Arbitration and Conciliation Act, 1996 - ss. 8, 11 and 37 -
Maharashtra Stamp Act, 1958 - ss. 30, 32A, 33, 34, 35, 36, 37, 41
and 58 - Commercial Courts Act, 2015 - s.13(1A) - Respondent
no.1 furnished bank guarantee for Rs.29.29 crores in favour of
KPCL, in pursuance of the work order awarded to it by KPCL for
work of washing of coal - Subsequently, respondent no.1 entered
into a sub-contract/work order dated 28.09.2015 (with arbitration
clause) with the appellant company for transportation of coal from
its washery - Appellant company also furnished bank guarantee of
Rs.3,36,00,000/- in favour of the banker of the respondent no.1 -
Dispute arose between KPCL and respondent no.1, which led to
invocation of the bank guarantee by KPCL - In turn, respondent
no.1 invoked the bank guarantee furnished by the appellant
company - Appellant filed a civil commercial suit against the
respondent no.1 for a declaration that respondent no.1 was not
entitled to encash the bank guarantee as the work order was not
acted upon - It was also alleged that invocation of bank guarantee
was fraudulent - The Commercial Court directed to maintain statusquo - Respondent no.1 filed an application u/s.8 of the 1996 Act
seeking reference to arbitration - Application rejected by the
Commercial Court - It held that the arbitration clause in the work
order dated 28.09.2015 was not a general arbitration clause, which
would cover bank guarantee - Bank guarantee was an independent
contract - Writ petition by respondent no.1 - The High Court held
that application u/s. 8 of the 1996 Act was maintainable and disputes
could be resolved through arbitration - It also held that the filing
of suit before the Commercial Court was not justified - Issues arised
for consideration before the Supreme Court were: (i) Whether an
arbitration agreement would be enforceable and acted upon, even
if the work order dated 28.09.2015 is unstamped and un-
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enforceable under the Stamp Act; (ii) Whether allegation of the
fraudulent invocation of bank guarantee is an arbitrable dispute;
(iii) Whether writ petition was maintainable to challenge an order
rejecting an application for reference to arbitration u/s.8 of the
1996 Act - Held: Non-payment or deficiency of Stamp duty on the
work order does not invalidate the main contract - The arbitration
agreement contained in the work order is independent and distinct
from the underlying commercial contract - s.3 of the Maharashtra
Stamp Act does not subject an arbitration agreement to payment of
Stamp Duty - On the basis of the doctrine of separability, the
arbitration agreement being a separate and distinct agreement from
the underlying commercial contract, would survive independent of
the substantive contract - The arbitration agreement would not be
rendered invalid, un-enforceable or non-existent, even if the
substantive contract is not admissible in evidence, or cannot be
acted upon on account of non-payment of Stamp Duty - The civil
aspect of fraud is considered arbitrable - The criminal aspect of
fraud, forgery, or fabrication, which would be visited with penal
consequences and criminal sanctions can be adjusted by a Court
of law, since it may result in conviction, which is in the realm of
public law - In the instant case, the allegation of fraud with respect
to the invocation of the bank guarantee are arbitrable, since it arises
out of the disputes between the parties inter se and is not in realm of
public law - The writ petition filed by the respondent no.1 was not
maintanable, since a statutory remedy under the amended s.37 of
the 1996 Act is available.
Arbitration - Arbitration agreement - Held: An arbitration
agreement is a distinct and separate agreement, which is independent
from the substantive commercial contract in which it is embedded -
This is based on the premise that when parties enter into a commercial
contract containing an arbitration clause, they are entering into
two separate agreements viz. (i) the substantive contract which
contains the rights and obligations of the parties arising from the
commercial transaction; and, (ii) the arbitration agreement which
contains the binding obligation of the parties to resolve their disputes
through the mode of arbitration.
Doctrines/Principles - Doctrine of separability of the
arbitration agreement - Held: The doctrine of separability of the
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arbitration agreement connotes that the invalidity, ineffectiveness,
or termination of the substantive commercial contract, would not
affect the validity of the arbitration agreement, except if the
arbitration agreement itself is directly impeached on the ground
that the arbitration agreement is void ab initio.
Doctrines/Principles - Doctrine of kompetenz - Held:
kompetenz implies that the arbitral tribunal has the competence to
determine and rule on its own jurisdiction, including objections
with respect to the existence, validity, and scope of the arbitration
agreement, in the first instance, which is subject to judicial scrutiny
by the courts at a later stage of the proceedings - Under the
Arbitration Act, the challenge before the Court is maintainable only
after the final award is passed as provided by sub-section (6) of
s.16.
Referring the issue to the Constitution Bench, the Court
HELD: Validity of an arbitration agreement in an unstamped
agreement.
1. The Stamp Act is a fiscal measure enacted to secure the
revenue of the State on certain classes of instruments specified
in Schedule I of the Act. The stringent provisions of the Stamp
Act have been framed to protect the interest of the revenue of
the State. Section 34 of the Maharashtra Stamp Act, 1958 operates
as a statutory bar to an unstamped instrument being admitted in
evidence, or being acted upon, for any purpose, by any authority
having by law or consent of parties, the power to receive evidence,
unless such instrument is duly stamped. The proviso to Section
34 states that upon payment of the requisite stamp duty, the
instrument may be admitted in evidence. The words "for any
purpose" occurring in the Indian Stamp Act was interpreted by
the Privy Council in Ram Rattan v. Parma Nand. [Para 5.4][969F-H]
2. The arbitration agreement contained in the Work Order
is independent and distinct from the underlying commercial
contract. The arbitration agreement is an agreement which
provides the mode of dispute resolution. Section 3 of the
Maharashtra Stamp Act does not subject an arbitration agreement
to payment of Stamp Duty, unlike various other agreements
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS
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enlisted in the Schedule to the Act. This is for the obvious reason
that an arbitration agreement is an agreement to resolve disputes
arising out of a commercial agreement, through the mode of
arbitration. On the basis of the doctrine of separability, the
arbitration agreement being a separate and distinct agreement
from the underlying commercial contract, would survive
independent of the substantive contract. The arbitration
agreement would not be rendered invalid, un-enforceable or nonexistent, even if the substantive contract is not admissible in
evidence, or cannot be acted upon on account of non-payment of
Stamp Duty. [Para 6.4][977-G-H; 978-A-B]
3. In view of this Court, there is no legal impediment to the
enforceability of the arbitration agreement, pending payment of
Stamp Duty on the substantive contract. The adjudication of the
rights and obligations under the Work Order or the substantive
commercial contract would however not proceed before
complying with the mandatory provisions of the Stamp Act. [Para
6.6][979-G-H; 980-A]
4. The Stamp Act is a fiscal enactment for payment of stamp
duty to the State on certain classes of instruments specified in
the Stamp Act. Section 40 of the Indian Stamp Act,1899 provides
the procedure for instruments which have been impounded, and
sub-section (1) of Section 42 requires the instrument to be
endorsed after it is duly stamped by the concerned Collector.
Section 42(2) provides that after the document is duly stamped,
it shall be admissible in evidence, and may be acted upon. [Para
6.7][980-B-C]
5. In view of this Court, the decision in SMS Tea Estates
does not lay down the correct position in law on two issues i.e. (i)
that an arbitration agreement in an unstamped commercial
contract cannot be acted upon, or is rendered un-enforceable in
law; and (ii) that an arbitration agreement would be invalid where
the contract or instrument is voidable at the option of a party,
such as u/S. 19 of the Indian Contract Act, 1872. This Court holds
that since the arbitration agreement is an independent agreement
between the parties, and is not chargeable to payment of stamp
duty, the non-payment of stamp duty on the commercial contract,
would not invalidate the arbitration clause, or render it un-
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enforceable, since it has an independent existence of its own.
The view taken by the Court on the issue of separability of the
arbitration clause on the registration of the substantive contract,
ought to have been followed even with respect to the Stamp Act.
The non-payment of stamp duty on the substantive contract would
not invalidate even the main contract. It is a deficiency which is
curable on the payment of the requisite Stamp Duty. [Para
6.8][980-C-F]
6. The Garware judgment has followed the judgment in SMS
Tea Estates. The Counsel for the Appellant has placed reliance
on paragraph 22 of the judgment 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. This
Court holds that this finding is erroneous, and does not lay down
the correct position in law. This Court has already held that an
arbitration agreement is distinct and independent from the
underlying substantive commercial contract. Once the arbitration
agreement is held to have an independent existence, it can be
acted upon, irrespective of the alleged invalidity of the commercial
contract. [Para 6.10][980-B-D]
7. This Court doubt the correctness of the view taken in
paragraph 92 of the three-judge bench in Vidya Drolia. This Court
considers it appropriate to refer the findings in paras 22 and 29
of Garware Wall Ropes Limited, which has been affirmed in
paragraph 92 of Vidya Drolia, to a Constitution Bench of five
judges. [Para 6.12][983-B]
8. The next issue which arises is as to which authority would
exercise the power of impounding the instrument under Section
33 read with Section 34 of the Maharashtra Stamp Act, in a case
where the substantive contract contains an arbitration agreement.
[Para 7][983-C]
9. In an arbitration agreement, the disputes may be referred
to arbitration by three modes.
a) The first mode is where the appointment of the arbitrator
takes place by the parties consensually in accordance with the
terms of the arbitration agreement, or by a designated arbitral
institution, without the intervention of the court. In such a case,
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
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the arbitrator / tribunal is obligated by Section 33 of the Indian
Stamp Act, 1899 (or the applicable State Act) to impound the
instrument, and direct the parties to pay the requisite Stamp Duty
(and penalty, if any), and obtain an endorsement from the
concerned Collector. This would be evident from the provisions
of Section 34 of the Stamp Act which provides that "any person
having by law or consent of parties authority to receive evidence"
is mandated by law to impound the instrument, and direct the
parties to pay the requisite stamp duty.
b) The second mode of appointment is where the parties
fail to make the appointment in accordance with the arbitration
agreement, and an application is filed under Section 11 before
the Court to invoke the default power for making the appointment.
In such a case, the High Court, or the Supreme Court, as the
case may be, while exercising jurisdiction under Section 11, would
impound the substantive contract which is either unstamped or
inadequately stamped, and direct the parties to cure the defect
before the arbitrator / tribunal can adjudicate upon the contract.
c) The third mode is when an application is filed under
Section 8 before a judicial authority for reference of disputes to
arbitration, since the subject matter of the contract is covered by
an arbitration agreement. In such a case, the judicial authority
will make the reference to arbitration. However, in the meanwhile,
the parties would be directed to have the substantive contract
stamped in accordance with the provisions of the relevant Stamp
Act, so that the rights and obligations emanating from the
substantive contract can be adjudicated upon. [Para 7.1][983-DH]
Whether the fraudulent invocation of the Bank Guarantee
is arbitrable?
10. In view of this Court, all civil or commercial disputes,
either contractual or non- contractual, which can be adjudicated
upon by a civil court, in principle, can be adjudicated and resolved
through arbitration, unless it is excluded either expressly by
statute, or by necessary implication. The Arbitration and
Conciliation Act, 1996 does not exclude any category of disputes
as being non arbitrable. Section 2(3) of the Arbitration Act
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however recognizes that certain categories of disputes by law
may not be submitted to arbitration. In all jurisdictions, certain
categories of disputes are reserved by the legislature, as a matter
of public policy, to be adjudicated by a court of law, since they lie
in the realm of public law. [Para 8.10][988-F-G; 989-A]
11. Traditionally, disputes relating to rights in rem are
required to be adjudicated by courts and / or statutory tribunals.
A right in rem is a right exercisable against the world at large.
Actions in rem refer to actions which create a legal status such
as citizenship, divorce, testamentary and probate issues, etc. A
lis in rem is not arbitrable by a private tribunal constituted by the
consent of parties. Actions in personam determine the rights and
interests of parties to the subject matter of the dispute, which
are arbitrable. The broad categories of disputes which are
considered to be non arbitrable are penal offences which are
visited with criminal sanction; offences pertaining to bribery /
corruption; matrimonial disputes relating to divorce, judicial
separation, restitution of conjugal rights, child custody and
guardianship matters, which pertain to the status of a person;
testamentary matters which pertain to disputes relating to the
validity of a Will, grant of probate, letters of administration,
succession, which pertain to the status of a person, and are
adjudicated by civil courts. [Para 8.11][989-B-D]
12. The civil aspect of fraud is considered to be arbitrable
in contemporary arbitration jurisprudence, with the only
exception being where the allegation is that the arbitration
agreement itself is vitiated by fraud or fraudulent inducement, or
the fraud goes to the validity of the underlying contract, and
impeaches the arbitration clause itself. Another category of cases
is where the substantive contract is "expressly declared to be
void" under Section 10 of the Indian Contract Act, 1872 where
the agreement is entered into by a minor (without following the
procedure prescribed under the Guardian and Wards Act, 1890)
or a lunatic, which would be with a party incompetent to enter
into a contract. [Para 8.12][990-B-D]
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13. The ground on which fraud was held to be non arbitrable
earlier was that it would entail voluminous and extensive
evidence, and would be too complicated to be decided in
arbitration. In contemporary arbitration practice, arbitral tribunals
are required to traverse through volumes of material in various
kinds of disputes such as oil, natural gas, construction industry,
etc. The ground that allegations of fraud are not arbitrable is a
wholly archaic view, which has become obsolete, and deserves
to be discarded. However, the criminal aspect of fraud, forgery,
or fabrication, which would be visited with penal consequences
and criminal sanctions can be adjudicated only by a court of law,
since it may result in a conviction, which is in the realm of public
law. [Para 8.16][992-E-G]
14. In the present case, the allegations of fraud with respect
to the invocation of the Bank Guarantee are arbitrable, since it
arises out of disputes between parties inter se, and is not in the
realm of public law. [Para 8.17][993-A]
Maintainability of the Writ Petition
15. This Court is of the view that the Writ Petition filed by
the Respondent No. 1 to challenge the Order dated 18.01.2018
passed by the Special Commercial Court / District Judge-I in
Commercial Dispute No. 62/2017 was not maintainable, since a
statutory remedy under the amended Section 37 of the Arbitration
Act is available. [Para 9.1][993-B-C]
16. Since the judgment and order of the Commercial Court
dated 18.01.2018 refusing to refer the parties to arbitration was
an appealable order under Section 37(1)(a) of the Arbitration Act,
the Writ Petition was not maintainable. The appeal would lie before
the Commercial Appellate Division of the High Court under
Section 13(1A) of the Commercial Courts Act, 2015. [Para
9.2][993-E-F]
17. This Court considers it appropriate to refer the following
issue, to be authoritatively settled by a Constitution bench of
five judges of this Court :
"Whether the statutory bar contained in Section 35 of the
Indian Stamp Act, 1899 applicable to instruments
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chargeable to Stamp Duty under Section 3 read with the
Schedule to the Act, would also render the arbitration
agreement contained in such an instrument, which is not
chargeable to payment of stamp duty, as being non-existent,
un-enforceable, or invalid, pending payment of stamp duty
on the substantive contract/instrument?'' [Para 12][995-CE]
Vidya Drolia & Ors. v. Durga Trading Corporation
[2019] SCR 465; Garware Wall Ropes Limited v.
Coastal Marine Constructions and Engineering Limited
(2019) 9 SCC 209 : [2019] 5 SCR 579 - referred to
Constitution Bench.
SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co.
Pvt. Ltd. (2011) 14 SCC 66 : [2011] 9 SCR 382 - partly
overruled.
Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern
Coal Field Ltd. (2020) 2 SCC 455; A. Ayyasamy v.
Parmasivam & Ors. (2016) 10 SCC 386 : [2016] 11
SCR 521; Hindustan Steel Limited v. M/s. Dilip
Construction Company (1969) 1 SCC 597 : [1969] 3
SCR 736 - relied on.
SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618
: [2005] 4 Suppl. SCR 688; National Insurance Co. v.
Boghara Polyfab (2009) 1 SCC 267 : [2008] 13 SCR
638; Mayavati Trading Private Limited v. Pradyuat Deb
Burman. (2019) 8 SCC 714 : [2019] 12 SCR 123;
Shriram EPC Limited v. Rioglass Solar SA (2018) 18
SCC 313 : [2018] SCR 749; Duro Felguera v.
Gangavaram Port Ltd. (2017) 9 SCC 729 : [2017] 10
SCR 285; N. Radhakrishnan v. Maestro Engineers.
(2010) 1 SCC 72 : [2009] 15 SCR 371; Abdul Kadir v.
Madhav Prabhakar AIR 1962 SC 406 : [1962] 3 SCR
702; Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra
(2012) 2 SCC 144 : [2011] 10 SCR 685; Ameet Lalchand
Shah & Ors. v. Rishabh Enterprises & Anr. (2018) 15
SCC 678 : [2018] 6 SCR 1001; Rashid Raza v. Sadaf
Akhtar (2019) 8 SCC 710 : [2019] 12 SCR 460; Avitel
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS
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Post Studioz Ltd. & Ors. v. HSBC PI Holdings
(Mauritius Limited) (2020) SCC OnLine SC 656; Naina
Thakkar v. Annapurna Builders. (2013) 14 SCC 354;
Deccan Paper Mills v. Regency Mahavir (2020) SCC
OnLine SC 655; Booz Allen & Hamilton Inc. v. SBI
Home Finance Ltd. (2011) 5 SCC 532 : [2011]
7 SCR 310; Swiss Timing Ltd. v. Commonwealth Games
2010 Organising Committee (2014) 6 SCC 677 : [2014]
6 SCR 514; State of West Bengal v. Associated
Contractors (2015) 1 SCC 32 : [2014] 10 SCR 426;
Swiss Timing Ltd. Avitel Post Studioz Ltd. & Ors. v.
HSBC PI Holdings (Mauritius Limited) (2020) SCC
OnLine SC 656; Avinash Kumar Chauhan v. Vijay
Krishna Mishra (2009) 2 SCC 532; Black Pearl Hotels
(P) Ltd. v. Planet M. Retail Ltd. (2017) 4 SCC 498;
Master Construction Company v. Union of India (2011)
12 SCC 357; A. Ayyasamy v. A. Paramasivam & Ors.
(2016) 10 SCC 386 : [2016] 11 SCR 521; Emaar MGF
Land Limited v. Aftab Singh (2019) 12 SCC 751; Vimal
Kishor Shah & Others v. Jayesh Dinesh Shah & Others.
(2016) 8 SCC 788 - referred to.
Ram Rattan v. Parma Nand (1945-46) 73 IA 28 : AIR
1946 PC 51 - referred to.
Heyman v. Darwins Ltd. [1942] AC 356; Bremer Vulkan
Schiffbau und Maschinefabrik v. South India Shipping
Corporation [1981] AC 909; Harbour Assurance v.
Kansa General International Insurance [1993] 1
Lloyd's Rep.
455 (CA); Lesotho Highlands
Development Authority v. Impregilo SpA and Others :
[2005] UKHL 43 : [2006] 1 A.C. 221; Gosset v.
Caparelli, Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963),
545; Fiona Trust & Holding Corporation v. Privalov
[2007] EWCA Civ 20; Fili Shipping Co. Ltd. and Others
v. Premium Nafta Products Ltd. and Others [2007]
UKHL 40; Prima Paint Corporation v. Flood & Conklin
MFG. CO. 388 US 395 (1967); Buckeye Check
Cashing, Inc v. Cardegna et. al US SC 440 (2006); Prima
Paint and Southland Corp. v. Keating. 79 L Ed 2d: 465
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US 1 (1984); Rent-A- Center, West, Inc. v. Jackon 561
US 63 (2010); Russel v. Russel [1880] 14 Ch. D 471 -
referred to.
Ivory Properties & Hotels Pvt. Ltd. v. Nusli Neville Wadia
2011 (2) Arb LR 479 (Bom); RRB Energy Ltd. v. Vestas
Wind System & Ors. (2015) 219 DLT 516 - referred
to.
Malhotra's Commentary on the Law of Arbitration,
[4th ed., Wolters Kluwer (2020)], p.339, Volume I.
Case Law Reference
(2020) 2 SCC 455
relied on
Para 4.2
[2016] 11 SCR 521
relied on
Para 4.3
[2019] 5 SCR 579
referred to a
Constitution Bench
Para 5.1
(2013) 14 SCC 354
referred to
Para 5.1
(2009) 2 SCC 532
referred to
Para 5.3
(2017) 4 SCC 498
referred to
Para 5.3
[2011] 9 SCR 382
partly overruled
Para 5.6
[2005] 4 Suppl. SCR 688
referred to
Para 5.7
[2008] 13 SCR 638
referred to
Para 5.7
(2011) 12 SCC 357
referred to
Para 5.7
[2017] 10 SCR 285
referred to
Para 5.8
[2019] 12 SCR 123
referred to
Para 5.8
[2018] SCR 749
referred to
Para 6
[1969] 3 SCR 736
relied on
Para 6.5
[2019] SCR 465
referred to a
Constitution Bench
Para 6.11
[2009] 15 SCR 371
referred to
Para 8.3
[1962] 3 SCR 702
referred to
Para 8.3
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[2011] 10 SCR 685
referred to
Para 8.5
[2016] 11 SCR 521
referred to
Para 8.6
[2019] 12 SCR 460
referred to
Para 8.7
[2018] 6 SCR 1001
referred to
Para 8.8
(2019) 12 SCC 751
referred to
Para 8.11
(2016) 8 SCC 788
referred to
Para 8.11
[2011] 7 SCR 310
referred to
Para 8.11
[2014] 6 SCR 514
referred to
Para 8.15
[2014] 10 SCR 426
referred to
Para 8.15
CIVIL APPELATE JURISDICTION: Civil Appeal Nos. 38023803 of 2020.
From the Judgment and Order dated 30.09.2020 in WP No. 1801/
2020 and dated 28.10.2020 in RAST No. 9819/2020 passed by the High
Court of Judicature at Bombay Bench at Nagpur.
Dhruv Mehta, Sr. Adv., Shyam Dewani, Gagan Sanghi and
Rameshwar Prasad Goyal, Advs. for the Appellant.
Siddharth Dave, Sr. Adv., Rajul Shrivastava, Ms. Charu Ambwani,
Amit Khare, Sanjay Kapur, Sambit Panja and Ms. Megha Karnwal,
Advs. for the Respondents.
The Judgment of the Court was delivered by
INDU MALHOTRA, J.
1. This case raises interesting issues with respect to the application
of the doctrine of separability of an arbitration agreement from the
underlying substantive contract in which it is embedded; 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; and, whether allegations of fraudulent invocation of
the bank guarantee furnished under the substantive contract, would be
an arbitrable dispute.
1.1 The Respondent No.1-Indo Unique Flame Ltd. ("Indo Unique")
applied for grant of work of beneficiation/washing of coal to the Karnataka
Power Corporation Ltd. ("KPCL") in an open tender. KPCL awarded
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the Work Order vide letter of Award No.A1M1B3/Washed Coal/1052
dated 18.09.2015 to Indo Unique.
In pursuance of the Work Order dated 18.09.2015, the Respondent
No.1 Company furnished Bank Guarantees for Rs.29.29 crores in favour
of KPCL through its bankers, State Bank of India ("SBI"), the
Respondent No.2 herein.
1.2 Indo Unique, the Respondent No.1 herein, subsequently entered
into a sub-contract termed as a Work Order dated 28.09.2015 with the
Appellant Company - M/s. N.N. Global Mercantile Pvt. Ltd. ("Global
Mercantile"), for the transportation of coal from its washery at Village
Punwat, District Yavatmal to the stockyard, siding, coal handling and
loading into the wagons at Pandharpaoni siding, District Chanderpur,
Maharashtra.
Clause 9 of the Work Order provided for furnishing a security
deposit which reads as :
"9. Security Deposit : You will submit the Bank Guarantee for
Rs.5.00 crores for the average stock of washed coal lying at your
stockyard. This Bank Guarantee can be issued from any
nationalised Bank/first class bank, initially valid for a period of 18
(eighteen) months."
Clause 10 of the Work Order incorporates an arbitration clause,
which reads as:
"10. Arbitration : In case of any dispute due to difference of opinion
in interpretation of any clause or terms and conditions or meaning
of the work or language the decision of the arbitrator appointed
with mutual consent shall be treated as final and binding on both
the parties."
1.3 As per Clause 9 of the Work Order, Global Mercantile furnished
a Bank Guarantee for Rs.3,36,00,000/- on 30.09.2015, in favour of SBIthe banker of Indo Unique.
The Bank Guarantee was extended from time to time, and was
last extended on 10.11.2017.
1.4 Under the principal contract with KPCL dated 18.09.2015,
certain disputes and differences arose with Indo Unique, which led to
the invocation of the Bank Guarantee by KPCL on 06.12.2017.
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS [INDU MALHOTRA, J.]
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1.5 Indo Unique, on 07.12.2017, invoked the Bank Guarantee
furnished by Global Mercantile under the Work Order.
It is the invocation of this Guarantee which has led to the present
proceedings.
1.6 Global Mercantile filed a Civil (Commercial) Suit No.62 of
2017 against Indo Unique, and its banker SBI, as also the banker of the
Appellant i.e. the Union Bank of India (Respondent No.3 herein), before
the Commercial Court, Nagpur praying inter alia for a declaration that
Indo Unique was not entitled to encash the bank guarantee as the Work
Order had not been acted upon. It was expressly stated that Indo Unique
had not allotted any work under the Work Order, nor were any invoices
raised, or payments made by it. Consequently, there was no loss suffered
which would justify the invocation of the Bank Guarantee. It was alleged
that the invocation of the Bank Guarantee was fraudulent, since it was
not in terms of the Work Order, being a conditional guarantee linked to
the performance of work.
The Commercial Court vide an ex parte ad interim Order dated
15.12.2017 directed status-quo to be maintained with respect to the
enforcement of the Bank Guarantee.
1.7 Indo Unique filed an application under Section 8 of the
Arbitration and Conciliation Act, 1996 ("Arbitration Act") in Civil
(Commercial) Suit No.62 of 2017, seeking reference of disputes to
arbitration.
Global Mercantile opposed the application under Section 8 as being
not maintainable since the Bank Guarantee was a separate and
independent contract, and did not contain any arbitration clause.
1.8 The Commercial Court vide Order dated 18.01.2018 rejected
the application under Section 8, and held that the arbitration clause in the
Work Order dated 28.09.2015 was not a general arbitration clause, which
would cover the Bank Guarantee. The Bank Guarantee was an
independent contract between SBI and Union Bank of India for due
performance of the contract. The Court noted the contention of Global
Mercantile that neither of the parties had performed any part of the
Work Order dated 28.09.2015, and consequently held that the jurisdiction
of the Commercial Court was not ousted by the arbitration agreement.
1.9 Indo Unique then filed Civil Revision Petition No.9 of 2018
before the Bombay High Court challenging the Order passed by the
Commercial Court.
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On an objection being raised on the maintainability of the Civil
Revision Petition, the High Court vide Order dated 09.07.2020 permitted
the withdrawal of the Civil Revision Petition, with liberty to file a petition
under Articles 226 and 227 of the Constitution of India.
1.10 Indo Unique filed W.P. No.1801 of 2020 before the Bombay
High Court to quash and set aside the Order dated 18.01.2018 passed
by the Commercial Court/District Judge-I, Nagpur in Civil (Commercial)
Suit No.62/2017.
The High Court vide the Impugned Judgment dated 30.09.2020
held that it was the admitted position that there was an arbitration
agreement between the parties, and therefore the application under
Section 8 was maintainable. With respect to the contention that the
invocation of the Bank Guarantee was fraudulent, it was held that the
allegations of fraud did not constitute a criminal offence which would
entail recording of voluminous evidence. The disputes could be resolved
through arbitration, and the filing of the Suit before the Commercial Court
was not justified. The Commercial Court was not justified in restraining
the invocation of the bank guarantee in the absence of any finding on
fraud or special equities.
On the issue of the arbitration agreement being unenforceable
since the Work Order was unstamped, it was held that the plaintiff/
Appellant herein, could raise the issue either under Section 11 of the
Arbitration Act, or before the arbitral tribunal at the appropriate stage.
The Writ Petition was held to be maintainable, since there is no absolute
bar to entertain a Writ Petition even if an alternate remedy is available.
The Writ Petition was allowed vide Judgment and Order dated 30.09.2020,
and the Order dated 18.01.2018 passed by the Commercial Court was
set aside.
On the request of the counsel for the Appellant, the High Court
suspended the operation of its Order for a period of one month from
30.09.2020.
1.11 The Review Petition filed by the Appellant was withdrawn
vide Order dated 28.10.2020 passed in Review Application (ST) No.
9819 of 2020.
On the request by the counsel for the Appellant, the Order of stay
was continued till 20.11.2020.
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS [INDU MALHOTRA, J.]
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1.12 Aggrieved by the judgment of the High Court, Global
Mercantile has filed the present Special Leave Petition before this Court.
2. The issues which have arisen for our consideration are :
i.
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?
ii.
Whether allegation of the fraudulent invocation of the bank
guarantee is an arbitrable dispute?
iii. Whether a Writ Petition under Articles 226 and 227 of the
Constitution would be maintainable to challenge an Order
rejecting an application for reference to arbitration under
Section 8 of the Arbitration Act?
We will now deal with each of these issues.
3. Validity of an arbitration agreement in an unstamped
agreement
3.1
It is well settled in arbitration jurisprudence that an
arbitration agreement is a distinct and separate agreement,
which is independent from the substantive commercial
contract in which it is embedded. This is based on the
premise that when parties enter into a commercial contract
containing an arbitration clause, they are entering into two
separate agreements viz. (i) the substantive contract which
contains the rights and obligations of the parties arising from
the commercial transaction; and, (ii) the arbitration
agreement which contains the binding obligation of the
parties to resolve their disputes through the mode of
arbitration.
3.2
The autonomy of the arbitration agreement is based on
the twin concepts of separability and kompetenz -
kompetenz. The doctrines of separability and kompetenz
- kompetenz though inter-related, are distinct, and play an
important role in promoting the autonomy of the arbitral
process.
3.3
The doctrine of separability of the arbitration agreement
connotes that the invalidity, ineffectiveness, or termination
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of the substantive commercial contract, would not affect
the validity of the arbitration agreement, except if the
arbitration agreement itself is directly impeached on the
ground that the arbitration agreement is void ab initio.
3.4
The doctrine of kompetenz - kompetenz implies that
the arbitral tribunal has the competence to determine and
rule on its own jurisdiction, including objections with respect
to the existence, validity, and scope of the arbitration
agreement, in the first instance, which is subject to judicial
scrutiny by the courts at a later stage of the proceedings.
Under the Arbitration Act, the challenge before the Court
is maintainable only after the final award is passed as
provided by sub-section (6) of Section 16.
The stage at which the order of the tribunal regarding
its jurisdiction is amenable to judicial review, varies from
jurisdiction to jurisdiction. The doctrine of kompetenz -
kompetenz has evolved to minimize judicial intervention at
the pre-reference stage, and reduce unmeritorious
challenges raised on the issue of jurisdiction of the arbitral
tribunal.
3.5
The doctrine of separability was expounded in the
judgment of Heyman v. Darwins Ltd1 by the House of
Lords wherein it was held that English common law had
been evolving towards the recognition of an arbitration
clause as a separate contract which survives the termination
of the main contract.
Lord Wright in his opinion stated that :
"An arbitration agreement is collateral to the substantial
stipulations of the contract. It is merely procedural and
ancillary, it is a mode of settling disputes, though the
agreement to do so is itself subject to the discretion of
the court."
Lord MacMillan in his opinion stated that :
"It survives for the purpose of measuring the claims
arising out of the breach, and the arbitration clause
1 [1942] AC 356.
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS [INDU MALHOTRA, J.]
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survives for determining the mode of their settlement.
The purposes of the contract have failed, but the
arbitration clause is not one of the purposes of the
contract."
3.6
This rule has been affirmed in several cases, including
Bremer Vulkan Schiffbau und Maschinefabrik v. South
India Shipping Corporation2 in which Lord Diplock cited
Heyman as an authority for the assertion that :
"The arbitration clause constitutes a self-contained contract
collateral or ancillary to the shipbuilding agreement itself."
3.7
In Harbour Assurance v. Kansa General
International Insurance,3 the Court of Appeal held that if
the arbitration clause is not directly impeached, an arbitration
agreement is capable of surviving the invalidity of the
contract, so that the arbitrator has the jurisdiction to
determine the initial validity of the contract. It was opined
that:
"Once it became accepted that the arbitration clause is a
separate agreement, ancillary to the contract, the logical
impediment to referring an issue of the invalidity of the
contract to arbitration disappears. Provided that the
arbitration clause itself is not directly impeached (eg by a
non-est factum plea), the arbitration agreement is as a
matter of principled legal theory capable of surviving the
invalidity of the contract."
3.8
In Lesotho Highlands Development Authority v.
Impregilo SpA and others,4 the House of Lords affirmed
the view taken in Harbour Assurance (supra), wherein it
was held that an arbitration agreement is a distinct and
separable agreement from the underlying or principal
contract.
"21. It is part of the very alphabet of arbitration law as
explained in Harbour Assurance Co v. Kansa General
2 [1981] AC 909.
3 [1993] 1 Lloyd's Rep. 455 (CA).
4 [2005] UKHL 43 : [2006] 1 A.C. 221 at [21].
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International Insurance, ... spelled out in s. 7 of the Act,
that the arbitration agreement is a distinct and separable
agreement from the underlying or principal contract."
3.9
Article 16(1) of the Model Law incorporates the doctrine
of separability :
"Article 16. The arbitral tribunal may rule on its own
jurisdiction, including any objections with respect to the
existence or validity of the arbitration agreement. For that
purpose, an arbitration clause which forms a part of a
contract shall be treated as an agreement independent of
the other terms of the contract. A decision by the arbitral
tribunal that the contract is null and void shall not entail ipso
jure the invalidity of the arbitration clause."
3.10
The French Cour de Cassation recognised the doctrine
of separability in broad terms in the Gosset v. Caparelli,5
wherein it was held that:
"In international arbitration, the agreement to arbitrate,
whether concluded separately or included in the contract
to which it relates, is always save in exceptional
circumstances, ... completely autonomous in law which
excludes the possibility of it being affected by the possible
invalidity of the main contract."
3.11
The doctrine of kompetenz - kompetenz is based on
the premise that the arbitration agreement is separate and
independent from the substantive underlying contract in
which it is embedded. Equally, an arbitration agreement
exists and can be acted upon irrespective of whether the
main substantive contract is valid or not.
The Court of Appeal in the seminal decision rendered in
Fiona Trust & Holding Corporation v. Privalov,6 held
that the allegation of invalidity of the underlying contract,
would not preclude the arbitral tribunal from determining
the said issue in the first instance, even though the alleged
illegality would render the contract void from inception. In
5 Cass. Civ. Lere, 7 May 1963 (Dalloz, 1963), 545.
6 [2007] EWCA Civ 20.
M/s. N.N. GLOBAL MERCANTILE PVT. LTD. v. M/s. INDO
UNIQUE FLAME LTD. & OTHERS [INDU MALHOTRA, J.]
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this case, the arbitration agreement was contained in a
charter party agreement, wherein it was alleged that it had
been procured through bribery by the owner's agent, and
was invalid from its inception. It was held that only if the
arbitration agreement is itself directly impeached, and
rendered void or unenforceable on grounds which relate to
the arbitration agreement itself, and not merely as a
consequence of the invalidity of the underlying contract,
that the courts may refuse reference to arbitration. To
discourage parasitical challenges and dilatory tactics in
resisting reference to arbitration, the Court of Appeal held
in paragraph 38 that :
"38. ...