WHETHER NON–STAMPED COMMERCIAL AGREEMENT ARBITRABLE?

Supreme Court has set ambiguity at rest 

                                        ANIL K Khaware

                                  ADVOCATE

The hon’ble Supreme Court  has rendered a significant judgment on the issue of arbitrability of non –stamped commercial agreement containing arbitration clause.  The Arbitration & Conciliation Act 1996 (In short “A & C Act” or “1996 Act” or “Act”) is a comprehensive Act and the erstwhile Arbitration Act 1940 was replaced by virtue of that and for a purpose. The Arbitration (Amendment Act) 2015 was another substantive amendment and so was subsequent amendments in 2019 and 2021. In nutshell, there has been periodic changes in the 1996 Act to cater to the issues encountered and to find solution as regards developing institutional mechanism. However, core issue for the present purpose is to analyze a recent judgment passed by hon’ble Supreme Court captioned as N.N Global Mercantile Pvt Ltd Vs Indo Unique Flame Ltd & Ors (Civil Appeal No. 3802-3803/2020 which has cleared the air on a very vital issue i.e the effect of non-stamped agreement and whether it is arbitrable? It is quite significant, since, the ambiguity existed and persisted and thus it craved for finality and clarity. The earlier judgment reported as SMS Teas Estates (P) Ltd Vs Chandmari Tea Co (P) Ltd, (2011) 14 SCC 66 is overruled by the NN Globla (Supra)  judgment..  

The issue under consideration before the hon’ble Supreme Court was-

Whether the arbitration agreement which is embedded to the main agreement shall be treated as non-existent in law and unenforceable in law, if the underlying agreement/contract was not adequately stamped as per the applicable Stamp Acts?

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.

 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, but they are distinct, and play a pivotal role in promoting the autonomy of the arbitral process.

The instant case (NN Global) relates to application of the doctrine of separability of an arbitration agreement from the underlying substantive contract. The another dimension to the judgment is also as regards allegation of fraudulent invocation of bank guarantee furnished under the substantive contract and whether that may be treated as  arbitrable dispute?

To appreciate it in the touchstone of law , Section 7 of the Indian Contract Act, 1872 needs meticulous perusal. Section 7  requires the acceptance of a contract to be absolute and unqualified  Moreover, if an arbitration agreement is not valid or non-existent, the Arbitral Tribunal cannot assume jurisdiction to adjudicate upon the disputes. Even arbitrator cannot be appointed , if the arbitration agreement is not in writing, or the disputes are beyond the scope of the arbitration agreement. According to Article V(1)(a) of the New York Convention recognition and enforcement of an award may be refused if the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

To amplify it further, in an arbitration agreement, the disputes may be referred to arbitration by following three (3) modes.

a)      Mutually by the parties and as per the terms of the arbitration agreement, or by a designated Arbitral Institution, without the intervention of the court.

b)      By the court when application is filed under Section 11 of A & C Act 1996 is filed before the Court with a view to invoke the authority of making the appointment, if parties fail to make the appointment in accordance with the arbitration agreement, and.

c)      By the Court again, but, when an application is filed under Section 8 of A & C Act 1996 before a judicial authority for reference of disputes to arbitration, since the subject matter of the contract is covered by an arbitration agreement.

In  situation of (a) above, the arbitrator / tribunal is mandated by virtue of trap of 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). The endorsement shall be necessary from the concerned Collector to the above effect.  It is worthwhile to state that Section 34 of the Stamp Act prescribes 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.

In a case of (b) above, the High Court, or the Supreme Court, as the case may be, while exercising jurisdiction under Section 11, may impound the substantive contract, if that is either unstamped or inadequately stamped. The court may direct the parties to cure the defect before the arbitrator / tribunal and then the matter can be adjudicated upon as per contract. The appointment of Arbitrator shall only be within the domain of High Court, in case of Domestic Arbitration.

In a case of (c) , the judicial authority may  make the reference to arbitration, but in the meanwhile, the parties may 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.

The another dimension to it may also need discussion i.e what if an application under Section 9 of the Arbitration & Conciliation Act, 1996 is pending?  The Section 9 of A & C Act 1996 relates to interim relif/injunction. If it is brought to the attention of the Court that the substantive contract is not duly stamped, the Court may nevertheless grant ad-interim relief to safeguard the subject-matter of the arbitration. The substantive contract, though, may then be impounded, and the concerned party may be directed to take the necessary steps for payment of the requisite stamp duty in accordance with the provisions of the relevant Stamp Act, within a time-bound period.

A three-Judge Bench of Supreme Court in Hindustan Steel Limited v. M/s. Dilip Construction Company (1969) 1 SCC 597 has held the award is an “instrument” within the meaning of the Stamp Act and was required to be stamped. Unstamped award could not be received in evidence by the Court, nor could it be acted upon. The court could impound it and send it to the Collector for amount of duty and penalty levied thereon, the Collector may adjudge, then, whether it is duly stamped and he may require penalty to be paid thereon. An instrument which is not duly stamped cannot be received in evidence by any person who has authority to receive evidence, and it cannot be acted upon by that person or by any public officer.

Section 35 of Stamp Act, provides that once an instrument  is admitted in evidence, shall not, except as provided in Section 61, be called in question at any stage of the same suit or proceeding on the ground that the instrument has not been duly stamped. The trap of section 36 is important, as it stipulates that an instrument, once admitted in evidence, shall not be called in question at any stage of the same suit or proceeding on the ground that it has not been duly stamped. It is to be borne in mind that, though, Section 36 does not prohibit a challenge against an instrument that it shall not be acted upon, because it is not duly stamped, but on that premise there is no bar against an instrument, not duly stamped from being acted upon after payment of the stamp duty and penalty according to the procedure prescribed by the Act.

Furtehr, it is no longer res integra that the object of the Stamp Act is to secure fiscal compliance, so as to secure revenue for the State on certain classes of instruments: A litigant cannot be permitted to use the provision of Stamp Act as a weapon of technicality to meet the case of his opponent. Once, the interest of the revenue is secured, the document shall have all the meaning that could be attributed to it and a party staking his claim on the instrument will not be defeated on the ground of the initial defect in the instrument. Viewed in that perspective, it is obvious that Section 35 of the Stamp Act operates as a bar to an unstamped instrument being admitted in evidence or being acted upon; whereas Section 40 provides the procedure for instruments being impounded, sub-section (1) of Section 42 provides for certifying that an instrument is duly stamped, and sub-section (2) of Section 42 enacts the consequences resulting from such certification. There is thus no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract. However, the adjudication of the rights and obligations under the Work Order or the substantive commercial contract would not proceed before complying with the mandatory provisions of 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.

The hon’ble Supreme Court has held that decision in SMS Teas Estates (P) Ltd (Supra)  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. It is held 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-enforceable, since it has an independent existence of its own.

The view taken by the Supreme Court on the issue of separability of the arbitration clause on the registration of the substantive contract, is required 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, alright, but the same is  curable, once the payment of the requisite Stamp Duty is made.

The second issue in SMS Tea Estates (Supra) that a voidable contract would not be arbitrable as it affects the validity of the arbitration agreement, is again held that it is not the correct position in law. The allegations made by a party that the substantive contract has been obtained by coercion, fraud, or misrepresentation has to be proved by leading evidence on the issue. These issues can certainly be adjudicated through arbitration. The judgment in SMS Tea Estates (Supra) with respect to the aforesaid two issues did not lay down the correct position in law as is held in NN Global (Supra).

Interestingly, even in the Garware Wall Ropes Limited Vs Coastal Marine & Engineering Ltd (2019 9 SCC 209, the judgment in SMS Tea Estates (Supra) was followed. Though, subsequently, the Three (3) judge bench of Suporeme Court in N N Global (Supra) both are overruled. It is held that it is fallacious to understand that the arbitration clause would be non-existent in law, and unenforceable, till Stamp Duty is adjudicated and paid on the substantive contract. The said finding is held to be erroneous, and it is clearly spelt out that it does not lay down the correct position in law. It is held by Supreme Court in NN Global (Supra) 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 Ref: In Vidya Drolia & Ors. v. Durga Trading Corporation) Civil Appeal No.2402 of 2019 decided vide Judgment dated 14.12.2020.

RIGHTS IN REM

It is also significant to point out that, though, the Arbitration and Conciliation Act, 1996 does not exclude any category of disputes as being non arbitrable, still, certain categories of disputes by law may not be submitted to arbitration as such 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. For instance, disputes relating to rights in rem are required to be adjudicated by courts and / or statutory tribunals only. A right in rem implies that a right could be exercisable against the world at large. Similarly, actions in rem refer to actions that create a legal status such as citizenship, divorce, testamentary and probate issues, etc. Clearly, 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 Supreme Court in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532 has recognized some examples of disputes which are not arbitrable, and held that :

(i)          disputes relating to rights and liabilities which give rise to or arise out of criminal offences;

(ii)        matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

(iii)        guardianship matters;

(iv)        insolvency and winding up matters;

(v)         testamentary matters (grant of probate, letters of administration and succession certificate); and

(vi)        eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

Moreover, other categories of disputes that may not be arbitrable are:

Consumer  disputes relating to trusts, trustees and beneficiaries of a trust are governed by special enactments and may not be arbitrable.

 

ISSUE OF FRAUD-Whethr Arbitartor can adjduciate?

Therefore, all agreements /contracts if made by exercising free consent of parties who aee competent to enter into a contract, for a lawful consideration and with a lawful object, and if such contract are not expressly declared to be void shall be enforceable. The civil aspect of fraud can be adjudicated by an arbitral tribunal. Section 17 of the Indian Contract Act, 1872 defines that :

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his [agent], or to induce him to enter into the contract:

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

As per Sections 2(i) and (j) of the Indian Contract Act, 1872 such an agreement shall remain enforceable, and is not void, until fraud is proved. In Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee( 2014) 6 SCC 677,  a single judge (exercising powers u/S. 11) opined that when a plea is taken to avoid arbitration on the ground of the underlying contract being void, the court is required to ascertain the true nature of the defence. Often, the terms ‘void’ and ‘voidable’ are used loosely and interchangeably. The court ought to examine the plea by keeping in mind the provisions of the Indian Contract Act, 1872. In cases where the court comes to a conclusion that the contract is void without receiving any evidence, it may be justified in declining the reference to arbitration in a few isolated cases. These would be cases where the court can readily conclude that the contract is void upon a meaningful reading of the contract document itself. However, it would not be permissible to circumvent arbitration, where, the defence taken is that the contract is voidable. Even though Swiss Timing Ltd. was a decision of a designate of the Chief Justice under Section 11 of the 1996 Act (prior to the 2015 Amendment in 1996 Act), This would have no precedential value in view of the judgment of the Supreme Court in State of West Bengal v. Associated Contractors, (2015) 1 SCC 32,  the reasoning in Swiss Timing Ltd. has been cited with approval of Supreme Court in Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited) (2020) SCC OnLine SC 656. 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.

CONCLUSION:

The judgment N.N Global Mercantile Pvt Ltd( supra) has laid down law in the sphere of arbitrability of the agreement and on the issue of severing the arbitration agreement with the main agreement. The issue of registration of the agreement containing arbitration clause and arbitrability was causing consternation owing to lack of clarity. The clarity has now emerged and it is held that non-regoistration of arbitral agreement/agreement is a curable defect and shall not finally hit the agreement so a sto make it unenforceable. Even the issue of arbitrability of fraud and limit and extent of it vis a vis arbitrability has also been dealt with and it is clearly held that arbitrator is not precluded from deciding issue of fraud, unless, it entails the trap of forgery and necessity of appreciating voluminous evidence. The periphery is therefore clearly drawn.

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