NN Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & others; In Re: interplay between Indian Stamp Act and Indian Arbitration Act
The Arbitration and Conciliation Act of 1986[i] was enacted with the firm intention of reducing court intervention in deciding disputed matters. Over the years, this act has effectively settled disputes outside the courts, providing a timely alternative to lengthy and wearisome court procedures.

Before the enactment of this law, the legal system's complexity and technicalities were exploited to procrastinate matters for an unspecified period indefinitely. Article 16(1)(a)[ii] of the Act draws its genesis from Article 16 of the United Nations Commission on Internation Trade Law (UNCITRAL MODEL), This section talks about the "Doctrine of Severability", which asserts that even if a contract is cancelled or deemed invalid, the arbitration agreement or clause within it can remain valid independently.

The Global Mercantile judgment stands out for upholding the essence of the "Doctrine of Severability," making it incredibly significant. In the case of N.N Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. (judgment dated 25 April 2023), a seven-judge Constitution Bench led by Chief Justice D.Y. Chandrachud unanimously upheld the validity of an unstamped arbitration agreement. The bench decisively ruled that while an unstamped arbitration was inadmissible per the Stamp Act of 1899, it was not void ab initio, or from the get-go.

This judgment decisively overturns the 5-judge Bench decision in NN Global Mercantile v Indo Unique Flame (In April 2023)[iii] and SMS Tea Estates v Chandmari Tea Co. Pvt Ltd., (2011)[iv]. In NN Global, a five-judge Bench in a 3:2 majority held that an unstamped arbitration agreement was void and unenforceable.

Facts of the Present Case
In 2015, Indo Unique Flame Ltd. (Indo Flame) won a tender to work for Karnataka Power Corporation Ltd. (KPCL) and provided bank guarantees. They then subcontracted NN Global Mercantile Pvt. Ltd. (NN Global) for coal transportation, with NN Global providing a bank guarantee to Indo Flame. In 2017, KPCL invoked Indo Flame's bank guarantee, and Indo Flame, in turn, invoked NN Global's guarantee. NN Global refused, leading to a dispute.

Indo Flame sought arbitration, but NN Global argued against it, claiming the bank guarantee was a separate contract. The Commercial Court rejected Indo Flame's arbitration application in 2018. However, in 2020, the Bombay High Court reversed this decision, stating the dispute fell under arbitration. NN Global contended the arbitration agreement wasn't stamped, but the High Court disagreed Global appealed to the Supreme Court.

In the case between the Appellant and the Respondent, they had a subcontracting deal outlined in a Work Order. Clause 10 of this order included an Arbitration Clause. As per Clause 9, the Appellant provided a bank guarantee, which the Respondent used because of disputes. The Appellant then sued over the bank guarantee being cashed. The Respondent wanted the dispute referred to arbitration under Section 8 of the Arbitration Act, but the Commercial Court denied this.

The Respondent then filed a writ petition challenging the Commercial Court's decision, arguing that the Arbitration Agreement became unenforceable because the Work Order lacked stamping. The key question for the court was whether the Arbitration Agreement would still be valid and usable even if the Work Order wasn't stamped and thus not enforceable under the Stamp Act.

Factual Background
In the case of N.N. Global Mercantile (P) Ltd. v Indo Unique Flame Ltd., (2021)[v], a three-judge bench emphasized that an arbitration agreement should be regarded as separate and distinct from the underlying commercial contract, thus not being considered invalid, unenforceable, or non-existent. Subsequently, the matter was brought before a 5-judge Bench, which, in a 3:2 majority decision, concluded that unstamped arbitration agreements are not legally valid.

While this decision was backed by KM Joseph, Aniruddha Bose, and C.T. Ravikumar, JJ., dissenting opinions from Ajay Rastogi and Hrishikesh Roy, JJ., suggested that unstamped arbitration agreements are valid at the pre-referral stage. During the hearing of a curative petition, the 5-Judge Bench, including Dr. DY Chandrachud, C.J. Sanjay Kishan Kaul, Sanjiv Khanna, B R Gavai, and Surya Kant, JJ., referred the matter to a 7-Judge bench to hear the judgment concerning unstamped arbitration agreements

Issues Raised

• The court examined whether unstamped arbitration agreements could be presented as evidence despite the Stamp Act's provision deeming them inadmissible.
• The central issue addressed whether unstamped agreements would nullify the entire contract or solely impact the arbitration clause.
• The question at hand was whether the principle of separability would still be valid in cases where the contract lacks stamping and whether the arbitration clause would remain valid and enforceable.
• Whether an arbitration agreement would be enforceable and acted upon, even if the work order is unstamped and unenforceable under the Stamp Act?
• Whether allegation of the fraudulent invocation of the bank guarantee is an arbitrable dispute?
• 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 Act, 1996.

Arguments
Contentions put forth by the Petitioners:
The petitioner strongly asserted that the majority decision in the NN Global case was incorrect. They emphasized that the Court's powers under Section 11(6A)[vi] of the Arbitration Act were limited and categorically stated that the Court could only determine the existence of an arbitration agreement and nothing more. Additionally, they argued that the failure to stamp or insufficient stamping of an agreement was a "curable defect" and should not be the sole factor in deeming an arbitration agreement invalid.

They pointed out that while an unstamped arbitration may be unenforceable as per the Stamp Act, 1899, it should not be considered "void" as per the law of contracts. Furthermore, the petitioners strongly contended that an arbitration clause stood independently of the main contract. Therefore, they emphatically argued that an invalid contract also did not automatically invalidate the arbitration clause.

Contentions put forth by the Respondents:
The respondents emphatically asserted that the Court had no jurisdiction to answer any legal questions in the present case. Respondents contended that prima facie, this was a curative petition, breaching the rules of the Court's curative jurisdiction. The court disagreed, saying they had to hear it because it involved an important legal issue. They promised to only focus on that and not revisit the facts.

The respondent then argued firmly that the five-judge bench was right to declare that an unstamped arbitration was void, as per contract law, and further contended that an arbitration clause could not be severed from the main contract.

Judgement
Before delivering the judgment, CJI Chandrachud made it clear that referring the constitutional question to a seven-judge bench was valid. This clarification was in response to arguments by Senior Advocates Shyam Divan and Nikhil Nayyar (RESPONDENTS), who claimed the court couldn't hear the case. They said it was wrong to reconsider the decision in NN Global through a curative petition filed under a different case, Bhaskar Raju v Dharmaratnakara.

Consequences of Failure to Stamp an Instrument- The court acknowledged Section 35 of the Stamp Act, which states that instruments not properly stamped are not admissible as evidence. However, under Section 42 of the same Act, an instrument becomes admissible once the required duty and any penalty are paid. After paying the correct amount according to Schedule I and any penalty. Once endorsed, the instrument can be used as if it were properly stamped, including being admitted as evidence, registered, acted upon, or authenticated.

The Chief Justice clarified that not paying or underpaying stamp duty makes an arbitration agreement inadmissible as evidence under the Stamp Act, but it doesn't make it void. The bench added that not stamping or under-stamping is a 'Curable Defect'. The Court clarified that the admissibility of a document as evidence is different from its legal validity or enforceability. While the Stamp Act makes unstamped documents inadmissible as evidence, it doesn't render them void. The Act provides a process to cure the defect of non-payment of stamp duty. Unlike void agreements, which can't be cured, the Stamp Act allows for rectification. The purpose of the Stamp Act is to generate government revenue, and it must be interpreted with this in mind.

The Doctrine of Severability- The court explained that the idea of separability or severability of an arbitration agreement recognizes that it stands apart from the main contract. This principle is crucial in arbitration law because it upholds the parties' freedom to resolve disputes through arbitration rather than in court. It ensures that even if the main contract ends or becomes invalid, the arbitration agreement remains valid.

This preserves the parties' intention and the integrity of the arbitration process. The court noted that Section 16(1) of the Arbitration Act upholds the separability of arbitration agreements from the main contract. This means that even if the main contract is invalid or terminated, the arbitration agreement remains valid. Justice Sanjiv Khanna while writing a concurring opinion stated that unstamped agreements are not rendered void or void ab initio.

Analysis
The case of N.N Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & ors addresses the interplay between the Indian Stamp Act and the Indian Arbitration Act, and it carries significant implications for arbitration agreements in India. The key issue at hand was whether an unstamped arbitration agreement would still be valid even if the underlying contract lacked stamping, rendering it unenforceable under the Stamp Act.

The case presented arguments from both the petitioners and the respondents. The petitioners contended that while an unstamped arbitration agreement might be unenforceable under the Stamp Act, it should not be considered void and should remain separate and distinct from the main contract. On the other hand, the respondents argued that an unstamped arbitration agreement should be deemed void, and the arbitration clause could not be severed from the main contract.

The seven-judge Constitution Bench unanimously upheld the validity of an unstamped arbitration agreement, overturning the previous 5-judge Bench decision. Chief Justice D.Y. Chandrachud clarified that while an unstamped arbitration agreement might be inadmissible as evidence under the Stamp Act, it does not render it void. The bench emphasized that the Stamp Act allows for rectification of the defect of non-payment of stamp duty and stressed the separability of arbitration agreements from the main contract. This means that even if the main contract is invalid or terminated, the arbitration agreement remains valid.

The ruling has far-reaching implications as it upholds the essence of the "Doctrine of Severability" and safeguards the parties' freedom to resolve disputes through arbitration rather than in court. It ensures that the arbitration agreement remains intact even if the main contract is void or ends, preserving the parties' intention and the integrity of the arbitration process. This decision provides clarity and certainty in the realm of arbitration agreements in India, bolstering the effectiveness of the Arbitration and Conciliation Act of 1986.The case of N.N Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & others affirmed the validity of unstamped arbitration agreements, clarifying that while they may be inadmissible as evidence, they are not void, ensuring the integrity of arbitration proceedings and preserving parties' autonomy in dispute resolution.

Conclusion
The case of N.N. Global Mercantile Pvt Ltd v. Indo Unique Flame Ltd & others has provided important clarity and certainty in the realm of arbitration agreements in India. The unanimous decision by the seven-judge Constitution Bench upheld the validity of unstamped arbitration agreements, emphasizing the separability of arbitration agreements from the main contract. This decision safeguards the parties' freedom to resolve disputes through arbitration and ensures the integrity of the arbitration process. Overall, this ruling bolster the effectiveness of the Arbitration and Conciliation Act of 1986 and affirms the significance of the "Doctrine of Severability" in preserving parties' autonomy in dispute resolution.

End-Notes:

• Arbitration and Conciliation Act, 1986, No. 26, Acts of Parliament, 1986 (India)
• Arbitration and Conciliation Act, 1986, § 16(1)(a), No. 26, Acts of Parliament, 1986 (India)
• N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495 (NN Global 2)
• SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66
• N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379 (NN Global 1)
• Arbitration and Conciliation Act, 1996, § 11(6A), No. 26, Acts of Parliament, 1996 (India)

Written By: Faraz Ahmad