N.N Global Mercantile Pvt Ltd Vs. Indo Unique Flame Limited

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FACTS OF THE CASE :

• Indo Unique Flame Limited was allotted a tender by Karnataka Power Corporation Limited (KPCL) for the supply of coal, in an open tender. Subsequently, Indo Unique Flame Limited (IUFL) entered into a sub-contract with Global Mercantile Private Limited (GMPL) to supply the coal. Along similar lines, KPCL was provided a guarantee by IUFL and further IUFL provided a guarantee by GMPL for the supply. The guarantee was extended from time to time by the parties over the period of the contract.
• KPCL due to certain differences with IUFL led to the invocation of the guarantee provided by IUFL. Further, IUFL invoked the guarantee provided by the GMPL. This invocation of guarantee by IUFL led to the proceedings in the commercial court initiated by the GMPL stating 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”.
• The main contract entered by the parties i.e., IUFL and GMPL is at the start of the contract which has a clause referring the disputes to the arbitration. After that all the transactions overwrite the main contract via the Work Order generated by the IUFL, this allows the arbitration clause to continue on the basis of the doctrine of separability.

• IUFL made an application to the Commercial Court referring to Section 8 of the Arbitration and Conciliation Act, 1996 asking for referring the dispute to the arbitrator for resolution. GMPL opposed the application stating that a bank guarantee is a different contract and there is no clause referring to the arbitration. The Commercial Court held that since neither party performed the contract entered upon in respect of the recent work order which overwrote the main contract, the court held that it would not accept the application made by the IUFL and would enforce its jurisdiction.
• IUFL approached the Bombay High Court challenging the order issued by the Commercial Court. The Bombay High Court issued an order stating that arbitration is maintainable. The contention of the court was that the allegations of fraud on the invocation of the bank guarantee provided, should not be construed as a criminal offence. Henceforth, admitted the application under Section 8 and directed the matter to the arbitrator.

ISSUES RAISED :

•  Whether an unstamped arbitration agreement is enforceable or not? 
•  Whether the allegation of fraudulent invocation of the bank guarantee is resolved by arbitration?

ARGUMENTS:

Plaintiff’s arguments :

• 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
• 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.
• 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

Defendant’s arguments :

• 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
• Indo Unique then filed Civil Revision Petition No.9 of 2018 before the Bombay High Court challenging the Order passed by the Commercial Court.  
• 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.
• 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.

JUDGEMENT :

• The decision passed by the Hon’ble Supreme Court (“the SC”) on 11th January, 2021 by the three-judge bench comprising of Justice D.Y. Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee in N.N Global Mercantile Limited Vs.  Indo Unique Flame Limited and Ors. (“NN Global”) had inter alia held severability and separability of an arbitration agreement from the underlying substantive agreement in which it may be embedded, thereby stating that non-stamping or insufficient stamping of the substantive agreement does not render the underlying arbitration agreement as void and unenforceable.
• On making reference to the Constitution Bench of 5 judges comprising Justice K.M. Joseph, Justice Annirudha Bose, Justice Ajay Rastogi, Justice Hrishikesh Roy and Justice C.T. Ravikumar, the said decision of the three-judge bench in NN Global was declared as not in accordance with the law. On 25th April, 2023, the SC, by a 3:2 majority held that an agreement containing an arbitration clause which is chargeable to stamp duty and is unstamped or insufficiently stamped, cannot be enforced as per sections 2(g) and 2(h) of the Indian Contract Act, 1872 thereby rendering such contracts non-existent in law and incapable of being acted upon.
• The SC further held that the courts must adjudicate upon the appropriate stamp duty payable in accordance with the applicable stamp acts; in this case Indian Stamp Act (“the Stamp Act”) on the principal agreement containing the arbitration clause while entertaining application under S.11 of the Arbitration and Conciliation Act, 1996 (“the Act”) for the appointment of the arbitrator(s)i.e if the court finds that there is a discrepancy with respect to the stamp duty payable on the agreement and the same isin contravention to the provisions of the Stamp Act, the instrument is liable to be impounded at that stage itself.

REFERENCE :

• https://blog.ipleaders.in

• https://www.indialaw.in
• https://lawfoyer.in

Written by Preeti an intern under legal vidhiya.

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