In M/s. N.N. GLOBAL MERCANTILE PVT. LTD. vs M/s. INDO UNIQUE FLAME LTD. & OTHERS, 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.
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 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?
Validity of an arbitration agreement in an unstamped agreement
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, are distinct, and play an important role in promoting the autonomy of the arbitral process.
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
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 agreement is void ab initio.
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.
The doctrine of separability was expounded in the judgment of Heyman v. Darwins Ltd 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.
In Harbour Assurance v. Kansa General International Insurance, 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.
The Court of Appeal in the seminal decision rendered in Fiona Trust & Holding Corporation v. Privalov, 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.
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.
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.
This Court in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. discussed the application of the doctrine of kompetenz – kompetenz in the Indian legislation.
With respect to a contract or instrument which is voidable at the option of a party (as by way of illustration u/S. 19 of the Indian Contract Act, 1872) in paragraph 15 of the judgment, it was held that the invalidity which attaches itself to the main agreement, may also attach itself to the arbitration agreement, if the reasons which make the main agreement voidable, exist in relation to the making of the arbitration agreement also.
Holding that the judgment of the Supreme Court in SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd. and Garware Wall Ropes vs Coastal Marine Constructions, was incorrect on these issues, the Supreme Court said that 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.
Whether the fraudulent invocation of the Bank Guarantee is arbitrable?
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.
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.
Comments
Post a Comment