N.N. Global Mercantile Pvt. Ltd. Vs Indo Unique Flame Ltd. & Others (Supreme Court of India)
Conclusion: 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 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. Thus, 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.
Held: The issue arose for consideration was with respect to the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it was embedded; whether an arbitration agreement would be non-existent in law, invalid or un-enforceable, 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. It was held that non-payment or deficiency of Stamp Duty on the Work Order did not invalidate the main contract. Section 34 provides that an unstamped instrument would not be admissible in evidence, or be acted upon, till the requisite stamp duty is paid. This would amount only to a deficiency, which can be cured on the payment of the requisite stamp duty. The point for consideration was whether the non-payment of Stamp Duty on the Work Order, would render the arbitration clause invalid, nonexistent, or unenforceable in law, till the stamp duty was paid on the substantive commercial contract. 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 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 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 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. 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.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
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 un-enforceable, 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 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 SBI-the 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.
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. 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.
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 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 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 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 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. … As we have sought to explain, once the separability of the arbitration agreement is accepted, there cannot be any question but that there is a valid agreement.
…
If there is a contest about whether an arbitration agreement had come into existence at all, the court would have a discretion as to whether to determine that issue itself, but that will not be the case where there is an overall contract which is said for some reason to be invalid eg for illegality, misrepresentation or bribery and the arbitration agreement is merely part of the contract. … ”
3.12 In the Appeal filed in the Fiona Trust case before the House of Lords, in Fili Shipping Co Ltd and others v. Premium Nafta Products Ltd and others7, Lord Hoffman opined :
“It amounts to saying that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement. The one should fall with the other because they would never have been separately concluded. But section 7 in my opinion means that they must be treated as having been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement.”
Lord Hope in his separate opinion, held that :
“The owners’ argument was not that there was no contract at all, but that they were entitled to rescind the contract including the arbitration agreement because the contract was induced by bribery. Allegations of that kind, if sound, may affect the validity of the main agreement. But they do not undermine the validity of the arbitration agreement as a distinct agreement. The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do. That being the situation in this case, the agreement to go to arbitration must be given effect.”
3.13 The law as it stands in U.K. today is that if the court while entertaining a plea to refer the parties to arbitration, is satisfied of the existence of the arbitration agreement, it is incumbent to refer the parties to arbitration, even if objections to the validity of the substantive contract are raised. Where the arbitration agreement is embedded in an underlying contract, the court would not entertain the dispute on the issue of jurisdiction until the arbitral tribunal has ruled on this issue. Lord Hoffman opined that :
“But that is in my opinion exactly the kind of argument which s 7 was intended to prevent. It amounts to saying that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement. The one should fall with the other because they would never have been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement.”8
3.14 On the issue of whether a claim of fraud in the inducement of the entire contract is to be decided by the court, or the arbitrator, was considered by the U.S. Supreme Court in Prima Paint Corporation v. Flood & Conklin MFG. CO.,9
The Court held that:
“If the claim is fraud in the inducement of the arbitration clause itself an issue which goes to the ‘making’ of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally……….
In so concluding, we not only honor the plain meaning of the statute but also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.”
3.15 The United States Supreme Court in Buckeye Check Cashing, Inc Cardegna et. al,10 followed the earlier decisions in Prima Paint and Southland Corp. v. Keating.11 Scalia, J. opined :
“Prima Paint and Southland answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this case, we conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court.”
3.16 In Rent-A- Center, West, Inc. v. Jackon,12 the U.S. Supreme Court opined :
“There are two types of validity challenges under § 2: “One type challenges specifically the validity of the agreement to arbitrate,” and “[t]he other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.” Buckeye, 546 U.S., at 444. In a line of cases neither party has asked us to overrule, we held that only the first type of challenge is relevant to a court’s determination whether the arbitration agreement at issue is enforceable. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 US 395, 403-404 (1967); Buckeye, supra, at 444-446; Preston v. Ferrer, 552 US 346, 353-354 (2008). That is because § 2 states that a “written provision” “to settle by arbitration a controversy” is “valid, irrevocable, and enforceable” without mention of the validity of the contract in which it is contained. Thus, a party’s challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate. “[A]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.” Buckeye, 546 U.S., at 445; see also id., at 447 (the severability rule is based on §2).
……..
The Court asserts that its holding flows logically from Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), in which the Court held that consideration of a contract revocation defense is generally a matter for the arbitrator, unless the defense is specifically directed at the arbitration clause, id., at 404. We have treated this holding as a severability rule: When a party challenges a contract, “but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract.” Buckeye Check Cashing, Inc. v. Cardegna, 546 US 440, 446 (2006).
The second line of cases bearing on who decides the validity of an arbitration agreement, as the Court explains, involves the Prima Paint rule. See ante, at 71. That rule recognizes two types of validity challenges. One type challenges the validity of the arbitration agreement itself, on a ground arising from an infirmity in that agreement. The other challenges the validity of the arbitration agreement tangentially—via a claim that the entire contract (of which the arbitration agreement is but a part) is invalid for some reason. See Buckeye, 546 U.S., at 444. Under Prima Paint, a challenge of the first type goes to the court; a challenge of the second type goes to the arbitrator. See 388 U.S., at 403-404; see also Buckeye, 546 U.S., at 444-445. The Prima Paint rule is akin to a pleading standard, whereby a party seeking to challenge the validity of an arbitration agreement must expressly say so in order to get his dispute into court.”
4. The Indian Arbitration and Conciliation Act, 1996 is based on the Model Law. Section 16 gives statutory recognition to the doctrine of separability and kompetenz – kompetenz. Section 16 provides :
“16. Competence of arbitral tribunal to rule on its jurisdiction:
(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, —
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”
4.1 The legislative policy of minimal interference is enshrined in Section 5, which by a non-obstante clause prohibits judicial intervention except as specified in Part I of the Arbitration Act. A conjoint reading of Sections 5 and 16 would indicate that all civil commercial matters, including the issue as to whether the substantive contract was voidable can be resolved through arbitration.
4.2 This Court in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.13, speaking through one of us (Indu Malhotra, J.) discussed the application of the doctrine of kompetenz – kompetenz in the Indian legislation, and observed :
“7.7. Based on the recommendations of the Law Commission, Section 11 was substantially amended by the 2015 Amendment Act, to overcome the effect of all previous judgments rendered on the scope of power by a non obstante clause, and to reinforce the kompetenz-kompetenz principle enshrined in Section 16 of the 1996 Act. The 2015 Amendment Act inserted sub-section (6-A) to Section 11 which provides that:
“(6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or subsection (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”
(emphasis supplied)
7.8. By virtue of the non obstante clause incorporated in Section 11(6-A), previous judgments rendered in Patel Engg. and Boghara Polyfab, were legislatively overruled. The scope of examination is now confined only to the existence of the arbitration agreement at the Section 11 stage, and nothing more.
7.9. Reliance is placed on the judgment in Duro Felguera S.A. v. Gangavaram Port Ltd. [Duro Felguera S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764. Refer to TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] , wherein this Court held that: (SCC p. 759, para 48)
“48. … From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple — it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”
(emphasis supplied)
7.10. In view of the legislative mandate contained in Section 11(6-A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the kompetenz-kompetenz principle.
7.11. The doctrine of “kompetenz-kompetenz”, also referred to as “compétence-compétence”, or “compétence de la recognized”, implies that the Arbitral Tribunal is empowered and has the competence to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of the arbitration agreement. This doctrine is intended to minimise judicial intervention, so that the arbitral process is not thwarted at the threshold, when a preliminary objection is raised by one of the parties. The doctrine of kompetenz-kompetenz is, however, subject to the exception i.e. when the arbitration agreement itself is impeached as being procured by fraud or deception. This exception would also apply to cases where the parties in the process of negotiation, may have entered into a draft agreement as an antecedent step prior to executing the final contract. The draft agreement would be a mere proposal to arbitrate, and not an unequivocal acceptance of the terms of the agreement. Section 7 of the Contract Act, 1872 requires the acceptance of a contract to be absolute and unqualified [Dresser Rand S.A. v. Bindal Agro Chem Ltd., (2006) 1 SCC 751. See also BSNL v. Telephone Cables Ltd., (2010) 5 SCC 213 : (2010) 2 SCC (Civ) 352. Refer to PSA Mumbai Investments Pte. Ltd. v. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525 : (2019) 1 SCC (Civ) 1] . If an arbitration agreement is not valid or non-existent, the Arbitral Tribunal cannot assume jurisdiction to adjudicate upon the disputes. Appointment of an arbitrator may be refused if the arbitration agreement is not in writing, or the disputes are beyond the scope of the arbitration agreement. Article V(1)(a) of the New York Convention states that 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”.
7.13. In view of the provisions of Section 16, and the legislative policy to restrict judicial intervention at the pre-reference stage, the issue of limitation would require to be decided by the arbitrator. Sub-section (1) of Section 16 provides that the Arbitral Tribunal may rule on its own jurisdiction, “including any objections” with respect to the existence or validity of the arbitration agreement. Section 16 is as an inclusive provision, which would comprehend all preliminary issues touching upon the jurisdiction of the Arbitral Tribunal. The issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the pre-reference stage under Section 11 of the Act. Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.”
4.3 In A. Ayyasamy v. Parmasivam & Ors.,14 Dr. D.Y. Chandrachud, in his separate opinion observed that :
“53. The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle.”
5. We will now apply the law to the facts of the present case.
5.1 The Appellant-Global Mercantile submitted that the application under Section 8 for reference of disputes to arbitration was not maintainable, since as per Section 34 of the Maharashtra Stamp Act, 1958 the Work Order being an unstamped document could not be received in evidence for any purpose, or acted upon, unless it is duly stamped. Consequently, the arbitration clause in the unstamped agreement also could not be acted upon or enforced since the arbitration clause would have no existence in law, unless the applicable stamp duty (and penalty, if any) is paid on the Work Order. Reliance was placed on paragraph 22 of the judgment in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited,15 wherein it has been held : “.. that an arbitration clause in an agreement would not exist when it is not enforceable by law”. It was submitted that the High Court while allowing the application under Section 8, had enforced a non-existent arbitration clause, which was in violation of Section 34 of the Maharashtra Stamp Act, 1958 and the law laid down by this Court.
It was further contended that since 03.01.2018 to date, the Respondent No.1 had not indicated its willingness to pay the stamp duty, even though the Appellant had raised this objection. There was no justifiable reason to grant any further opportunity to Respondent No.1 to pay the stamp duty, and enforce the clause in view of the judgment of this Court in Naina Thakkar v. Annapurna Builders.16
5.2 Indo Unique – the Respondent No.1 submitted that even though the Work Order dated 28.09.2015 is an unstamped agreement, it would be enforceable after it is duly stamped, for which an opportunity must be given to the parties to make up the deficient stamp duty and penalty as may be assessed by the Collector. Non-payment of stamp duty would not render the agreement unenforceable, but was a curable defect.
5.3 Statutory scheme under the Maharashtra Stamp Act, 1958. —
(a) Section 3 of the Maharashtra Stamp Act, 1958 is the charging section, which specifies the instruments which are chargeable to stamp duty of the amount specified in Schedule I of the Act.
Section 3 provides:
“3. Instruments chargeable with duty. —
Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in Schedule I as the proper duty therefore respectively, that is to say—
(a) every instrument mentioned in Schedule I, which, not having been previously executed by any person, is executed in the State on or after the date of commencement of this Act; ”
(b) Section 30 provides :
“30.- Duties by whom payable. –
In the absence of an agreement to the contrary, the expense of providing the proper stamp shall be borne, –
(a) in the case of any instrument described in any of the following articles of Schedule I, namely :-
…
…
(f-a) in case of instruments of works contract as provided in Article 63 of SCHEDULE I, by the person receiving the contract ;
…
(c) Section 32A provides :
“32A. Instrument of conveyance, etc. under valued how to be dealt with.–
(1) Every instrument of conveyance, exchange, gift, certificate of sale, deed of partition or power of attorney to sell immoveable property when given for consideration, deed of settlement or transfer of lease by way of assignment and also any other instruments mentioned in SCHEDULE I chargeable with duty on the basis of market value of the property, presented for registration under the provisions of the Registration Act, 1908, shall be accompanied by a true copy thereof.
Provided that, in case of such instruments executed on or after the 4th July 1980, to the date of commencement of the Bombay Stamp (Amendment) Act, 1985, an extract of the instrument to be taken from the registration record shall be deemed to be the true copy accompanying the instrument, presented for registration for the purposes of sub-section (1). …“
(d) Section 33 provides:
“ CHAPTER IV
Instruments not duly stamped
33. Examination and impounding of instruments.—
(1) Subject to the provisions of section 32A, every person having by law or consent of parties authority to receive evidence, and every person in charge of a public office, except an officer of police, or any other officer, empowered by law to investigate offences under any law for the time being in force, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions shall, if it appears to him that such instrument is not duly stamped, impound the same irrespective whether the instrument is or is not valid in law.
(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him in order to ascertain whether it is stamped with a stamp of the value and description required by the law for the time being in force in the State when such instrument was executed or first executed:
Provided that—
(a) nothing herein contained shall be deemed to require any Magistrate or Judge of Criminal Court to examine or impound, if he does not think fit so to do, any instrument coming before him in the course of any proceeding other than a proceeding under Chapter IX or Part D of Chapter X of the Code of Criminal Procedure, 1973;
(b) in the case of a Judge of a High Court, the duty of examining and impounding any instrument under this section may be delegated to such officer as the Court appoints in this behalf.”
Section 33 casts a statutory obligation on every person empowered by law, or holding a public office, or a person who by consent of parties (which would include an arbitrator) is empowered to receive evidence, to examine the instrument presented before him, and ascertain whether the instrument is duly stamped. This would include the court being an authority empowered to receive an instrument in evidence. In view of the statutory interdict, the bar against the admissibility of an unstamped instrument, is absolute in nature, including for a collateral purpose.17
The phrase “duly stamped” implies that the instrument must be stamped with the requisite amount of duty determined in accordance with the Schedule to the Act.18 If it is found that the instrument is not stamped, or inadequately stamped, it is mandated by law to impound the instrument, and deal with it in accordance with provisions of the Stamp Act.
(e) Section 34 operates as a statutory bar from receiving any instrument in evidence, or relying on it for any purpose whatsoever, or being acted upon, or registered, or authenticated, by any such person or public officer, unless the instrument is duly stamped.
Section 34 provides:
“34. Instruments not duly stamped inadmissible in evidence, etc.—No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer unless such instrument is duly stamped or if the instrument is written on sheet of paper with impressed stamp such stamp paper is purchased in the name of one of the parties to the instrument:
Provided that—
(a) any such instrument shall, subject to all just exceptions, be admitted in evidence on payment of—
(i) the duty with which the same is chargeable, or in the case of an instrument insufficiently stamped, the amount required to make up such duty, and
(ii) a penalty at the rate of 2 per cent of the deficient portion of the stamp duty for every month or part thereof, from the date of execution of such instrument:
Provided that, in no case, the amount of the penalty shall exceed double the deficient portion of the stamp duty.
(b) where a contract or agreement of any kind is effected by correspondence consisting of two or more letters and any one of the letters bears the proper stamp; the contract or agreement shall be deemed to be duly stamped;
(c) nothing herein contained shall prevent the admission of any instrument in evidence in any proceeding in a Criminal Court, other than a proceeding under Chapter IX or Part D of Chapter X of the Code of Criminal Procedure, 1973;
(d) nothing herein contained shall prevent the admission of any instrument in any court when such instrument has been executed by or on behalf of the Government or where it bears the certificate of the Collector as provided by Section 32 or any other provision of this Act;
(e) nothing herein contained shall prevent the admission of a copy of any instrument or of an oral admission of the contents of any instrument, if the stamp duty or a deficient portion of the stamp duty and penalty as specified in clause (a) is paid.”
(f) Section 35 provides that:
“35. Admission of instrument where not to be questioned.—Where an instrument has been admitted in evidence, such admission shall not, except as provided in section 58, be called in question at any stage of the same suit or proceeding on the ground that the instrument has not been duly stamped.”
(g) Section 36 provides that:
“36. Admission of improperly stamped instruments.—The State Government may make rules providing that, where an instrument bears a stamp of sufficient amount but of improper description, it may, on payment of the duty with which the same is chargeable, be certified to be duly stamped, and any instrument so certified shall then be deemed to have been duly stamped as from the date of its execution.”
(h) Section 37 provides that:
“37. Instruments impounded how dealt with.-
(10 When the person impounding an instrument under section 33 has by law or consent of parties authority to receive evidence and admits such instrument in evidence upon payment of a penalty as provided by section 34 or of duty as provided by section 36, he shall send to the Collector an authenticated copy of such instrument, together with a certificate in writing, stating the amount of duty and penalty levied in respect thereof, and shall send such amount to the Collector, or to such person as he may appoint in this behalf.
(2) In every other case, a person so impounding the original instrument shall prepare an authentic copy of such instrument and where it is a true copy or an abstract referred to in section 31 or true copy referred to in section 33A, he shall send such authentic copy or, the true copy or, as the case may be, an abstract to the Collector, for the purpose of taking action on the authentic copy or a true copy or, as the case may be, an abstract as if it were the original instrument and endorsing thereon a certificate with reference to the instrument under clause (a) of sub-section (1) of section 39 or under sub-section (1) of section 41, as the case may be. On receipt of the authentic copy, the true copy or, as the case may be, an abstract with the certificate as aforesaid endorsed thereon, the person who has impounded the original instrument shall copy on the original instrument the certificate endorsed on the authentic copy and shall authenticate such certificate; and where it is a true copy or an abstract on which the certificate as aforesaid is endorsed, the registering officer who has forwarded the true copy or an abstract shall make appropriate entries in respect of the instrument of which it was a true copy or an abstract, in the relevant register maintained by him and on an application made in this behalf issue under his signature a certificate to the effect that the proper duty or, as the case may be, the proper duty and penalty (stating the amount of each) have been levied in respect of that instrument, and the name and residence of the person paying such duty and penalty.”
Once the duty (and penalty, if any) leviable under Schedule I is paid on the instrument, and the instrument is duly endorsed by the Collector, the instrument shall be admissible in evidence, and acted upon as provided by Section 41 of the Maharashtra Stamp Act.
(i) Section 41 provides :
“ 41. Endorsement of instruments on which duty has been paid under section 34, 39 or 40 –
(1) When the duty and penalty (if any) leviable in respect of any instrument (not being any instrument referred to in sub-section (1) of section 32A), have been paid under section 34, section 39 or section 40, the person admitting such instrument in evidence or the Collector, as the case may be, shall certify by endorsement thereon that the proper duty or, as the case may be, the proper duty and penalty (stating the amount of each) have been levied in respect thereof, and the name and residence of the person paying them.
(2) Subject to the provisions of section 53A, every instrument so endorsed shall thereupon be admissible in evidence, and may be registered and acted upon and authenticated as if it had been duly stamped, and shall be delivered on the application in this behalf, to the person who produced it or to the person from whose possession it came into the hands of the Officer impounding it, or to any other person according to the directions of such person:
Provided that –
(a) no instrument which has been admitted in evidence upon payment of duty and a penalty under section 34, shall be so delivered before the expiration of one month from the date of such impounding, or if the Collector has certified that its further detention is necessary and has not cancelled such certificate;
(b) nothing in this section shall affect the provisions of rule 9 of Order XIII in Schedule I of the Code of Civil Procedure, 1908.”
(j) Section 58 provides that :
“58. Revision of certain decisions of Courts regarding the sufficiency of stamps.—
(1) When any Court in the exercise of its civil or revenue jurisdiction or any Criminal Court in any proceeding under Chapter IX or Part D of Chapter X of the Code of Criminal Procedure 1973, makes any order admitting any instrument in evidence as duly stamped or as not requiring a stamp, or upon payment of duty and a penalty under section 34, the Court to which appeals lie from, or reference are made by, such first mentioned Court may, of its own motion or on the application of the Collector, take such order into consideration.
(2) If such Court, after such consideration is of opinion that such instrument should not have been admitted in evidence without the payment of duty and penalty under section 34, or without the payment of a higher duty and penalty than those paid, it may record a declaration to that effect, and determine the amount of duty with which such instrument is chargeable, and may require,-
i. the party or person concerned to make the payment of the proper duty or the amount required to make up the same, together with a penalty under section 34, or payment of a higher duty and penalty than those paid, to itself or to the Collector; and
ii. any person in whose possession or power such instrument then is, to produce the same, and may impound the same when produced.
(3) When any declaration has been recorded under sub-section (2), the Court recording the same shall send a copy thereof to the Collector, and, where the instrument to which it relates has been impounded or is otherwise in the possession of such Court, shall also send him such instrument.
(3A) When the duty and penalty leviable in respect of any instrument in accordance with, the declaration made under sub -section (3) and required to be paid thereunder are paid to the Court or to the Collector, then the Court or, as the case may be, the Collector shall certify by endorsement thereon that the proper duty and penalty, stating the amount of each, have been le-vied in respect of such instrument, and the name and residence of the person paying the same.
(3B) Every instrument so endorsed shall thereupon be delivered, on an application in this behalf, to the person from whose possession the instrument came in the possession of such Court, or as such person may direct, to any other person authorised by him.
(4) The Collector may thereupon, notwithstanding anything contained in the order admitting such instrument in evidence, or in any certificate granted under section 41, or in section 42, prosecute any person for any offence against the stamp law which the Collector considers him to have committed in respect of such instrument:
Provided that –
(a) no such prosecution shall be instituted where the amount including duty and penalty, which, according to the determination of such Court, was payable in respect of the instrument under section 34 ,is paid to the Court or the Collector, unless the Collector thinks that the offence was committed with an intention of evading payment of the proper duty;
(b) except for the purposes of such prosecution no declaration made under this section shall affect the validity of any order admitting any instrument in evidence or of any certificate granted under section 41.”
(k) Item No. 63 of Schedule I of the Maharashtra Stamp Act, 1958 provides that :
