A three-Judge Bench of the Supreme Court comprising of Justice Dr. DY Chandrachud, Justice Indu Malhotra, and Justice Indira Banerjee in the case of M/s. N.N. Global Mercantile Pvt. Ltd. v.  M/s. Indo Unique Flame Ltd. & Others, in the exercise of its civil appellate jurisdiction, has held that the ground- that allegations of fraud are not arbitrable as a wholly archaic view, which has become obsolete and deserves to be discarded. The Bench observed while holding rightly that the allegations of fraud concerning 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.

Brief Facts

This case raises interesting issues concerning 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.”

Respondent No.1-Indo Unique Flame Ltd. applied for a grant of work of beneficiation/ washing of coal to the Karnataka Power Corporation Ltd. in an open tender. KPCL awarded the Work Order to Indo Unique, in pursuance of which, Respondent No.1 furnished Bank Guarantees for Rs.29.29 crores in favor of KPCL through SBI, the Respondent No.2.

Respondent No.1 subsequently entered into a sub-contract termed as a Work Order with Appellant Company (M/s. N.N. Global Mercantile Pvt. Ltd.) for the transportation of coal from its washery in Yavatmal to the stockyard, siding, coal handling, and loading into the wagons at Chanderpur, Maharashtra.

Clause 9 of the Work Order provided for furnishing a security deposit while Clause 10 incorporated an arbitration clause.

Under the principal contract with KPCL, certain disputes and differences arose with Indo Unique, which led to the invocation of the Bank Guarantee by KPCL on 06.12.2017. Indo Unique invoked the Bank Guarantee furnished by Global Mercantile. It was the invocation of this Guarantee which has led to the present proceedings.

Global Mercantile filed a Civil (Commercial) Suit against Indo Unique, and its banker SBI, and against Appellant before the Commercial Court, Nagpur praying 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 directed the status-quo to be maintained concerning the enforcement of the Bank Guarantee.

Indo Unique filed an application u/s 8 of the Arbitration and Conciliation Act, 1996  in Civil (Commercial) Suit, seeking reference of disputes to arbitration. Global Mercantile opposed the application u/s 8 as being not maintainable since the Bank Guarantee was a separate and independent contract, and did not contain an arbitration clause.

The Commercial Court rejected the application and held that the arbitration clause in the Work Order 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 the 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, and consequently held that the jurisdiction of the Commercial Court was not ousted by the arbitration agreement.

Indo Unique then filed Civil Revision Petition before the Bombay HC challenging the Order of Commercial Court. On an objection being raised on the maintainability of the Civil Revision Petition, the High Court permitted the withdrawal of the Civil Revision Petition, with the liberty to file a petition under Articles 226 and 227 of the Constitution of India.

Indo Unique filed W.P. before the Bombay High Court to quash and set aside the Order of Commercial Court, Nagpur in Civil (Commercial) Suit. The High Court 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 Concerning 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 offense 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 and the Order of Commercial Court was set aside. On the request of the counsel for the Appellant, the High Court suspended the operation of its Order for one month. The Review Petition filed by the Appellant was withdrawn. On the request by the counsel for the Appellant, the Order of stay was continued till 20.11.2020.

Aggrieved by the judgment of the High Court, Global Mercantile has filed the present Special Leave Petition before the Supreme Court.

Reasoning and Decision of the Court 

Observations concerning Fraud

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 as 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.

“In the present case, the allegations of fraud concerning 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.”

We are of the view that the Writ Petition filed by Respondent No. 1 to challenge the Order of Special Commercial Court was not maintainable, since a statutory remedy under the amended Section 37 of the Arbitration Act is available. Section 37(1) was amended. Section 37(1)(a) provides for an appeal to be filed against an Order refusing to refer the parties to the arbitration.

The Court held that since the judgment and order of the Commercial Court 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.

Further, after reiterating that both parties have admitted the existence of the arbitration agreement, the Court observed that:

“In the present case, since both parties have admitted the existence of the arbitration agreement between the parties, as recorded in the judgment of the High Court, and even before this Court during oral submissions, parties may either appoint a sole arbitrator consensually; failing which, an application u/S. 11 for the appointment of the arbitrator may be made before the High Court.”

Held

Given the discussion, the Court set aside the impugned judgment and order passed by the Bombay High Court; Secretary-General of SC was directed to impound the Work Order; on the determination of the Stamp Duty payable, the Appellant / Plaintiff was directed to make the payment assessed by the Collector u/S.30(f-a) of the Maharashtra Stamp Act, 1958 within four weeks from the date of receipt of communication of the Order; and Stamp Duty assessed by the Collector was directed to be subject to the statutory right available to file a revision/appeal under the Maharashtra Stamp Act.

WiConcerninghe invocation of the Bank Guarantee, the Court held the Appellant may seek interim relief u/S. 9 of the Arbitration and Conciliation Act, 1996. Stay granted by the High Court was extended for a further period of eight weeks.

Finally, it is then held in the last para 12 that,

“We are of the considered view that the finding in SMS Tea Estates and Garware that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, and render it non-existent in law, and un-enforceable, is not the correct position in law. In vi Givenfinding in paragraph 92 of the judgment in Vidya Drolia by a co-ordinate bench, which has affirmed the judgment in Garware, the aforesaid issue is required to be authoritatively settled by a Constitution benchBenchhis Court.

We consider it appropriate to refer the following issue, to be authoritatively settled by a Constitutionbench of five judges of this Court :

“Whether the statutory bar contained in Section 35 of the Indian Stamp Act, 1899 applicable  to instruments 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, unenforceable, or invalid, pending payment of stamp duty on the substantive contract /instrument? ”

In light of the same, the Registry may place this matter before the Hon’ble Chief Justice of India for appropriate orders/directions.”

The Bench thus made it clear that the ground that allegations of fraud are not arbitrable as a wholly archaic view, which has become obsolete and deserves to be discarded. It has also made it clear that if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of a proceeding under Section 17 of the Indian Contract Act, 1872, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to the conclusion that an otherwise arbitrable dispute, ceases to be so.