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This article is written by Debasmita Goswami, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

The Arbitration and Conciliation Act, 1996 (The Arbitration Act) was enacted with the sole intention of reducing the court’s intervention in the adjudication of the matters, providing easy redressal mechanisms for resolving the disputes and ensuring party autonomy. The Act is one of its kind further under Section 16(1)(a) which draws its genesis from Article 16 of the United Nations Commission on International Trade Law (UNCITRAL Model Law) enumerates the essence of “Doctrine of Severability” which essentially means that an arbitration agreement or an arbitration clause has the capacity to survive independently even if the said contract is repudiated or has been declared to be as void. The Hon’ble Supreme Court (The Apex Court) on 11th January 2021 in the case of M/S N.N. Global Mercantile v. M/S Indo Unique Flame Ltd. (Global Mercantile judgment) has set a landmark precedent overruling its erstwhile decision given in the case of Garware Wall Ropes Ltd. v. Coastal Marine Construction and Engineering Ltd (Garware judgment) and SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Co. Pvt. Ltd. (SMS Tea Estates judgment) wherein it had held that an arbitration agreement or an arbitration clause would be declared to be as invalid if the said contract in which the arbitration agreement/clause is embedded has not been duly stamped. The Global Mercantile judgment thus comes as a breath of fresh air for the parties further making India an arbitration-friendly hub and not making the parties entangled in the vicious circle of technical compliances. The Global Mercantile judgment being unique in its form upholding the essence of the “Doctrine of Severability” has therefore been extremely significant. Thus, for a better understanding of the readers, the appropriate reasoning given by the Apex Court in the Global Mercantile judgment has been further iterated below by the author.

Brief factual matrix

The parties Global Mercantile and Indo Unique entered into a contract termed as “Transport Work Order” for coal transportation from the washery. Further, it is significant to mention that Clause 9 of the “Transport Work Order” specified for furnishing of a security deposit in the form of a Bank Guarantee whereas Clause 10 of the said contract mentioned the arbitration clause. Series of disputes arose between Global Mercantile and Indo Unique, as a result, Indo Unique invoked the Bank Guarantee as per Clause 9 of the said contract to which Global Mercantile expressed its resistance by way of filing a suit. In retaliation, Indo Unique invoked the arbitration clause under Section 8 of the Arbitration Act in accordance with Clause 10 of the said agreement. However, Global Mercantile resisted this stating in its reasoning that the “Transport Work Order” in which the arbitration clause was enshrined was not duly stamped as per the provisions of the Maharashtra Stamp Act, 1958 and therefore argued that the arbitration clause stipulated in the said contract was said to be invalid due to non-stamping of the said contract.

Issue of the law raised

  • The core issue of law raised in the Global Mercantile judgment was that whether an arbitration agreement or an arbitration clause embedded in the contract would be said to be invalid on account of non-stamping of the said contract and non–fulfillment of the technical compliances. 
  • The second issue dealt with whether the allegation of fraudulent invocation of the bank guarantee is resolved by arbitration.

Analysis

The Apex Court in the Global Mercantile judgment has stood firm in establishing the true meaning and intent of the “Doctrine of Severability” placing its reliance on numerous International precedents one of the landmark being Gosset v. Caparelli, wherein the French Court has duly noted that the “Doctrine of Kompetenz–Kompetenz” signifies that an arbitration clause or an arbitration agreement has the capacity to survive the invalidity of the contract; is independent in its true meaning and essence. It further signifies that there is no room for direct impeachment of the arbitration clause. The relevant extract of the said French Court has been iterated below:

“In international arbitration, the agreement to arbitrate, whether concluded separately or included in the contract to which it relates, is always safe in exceptional circumstances, completely autonomous in law which excludes the possibility of it being affected by the possible invalidity of the main contract.”

Not only this the Apex Court has further placed its reliance on Section 16 of the Arbitration Act and Article 16 of the UNCITRAL Model Law which expressly mentions the independent survival of the arbitration agreement and the arbitration clause in spite of the contract being rendered as unenforceable. The Apex Court in its decision further observed, placing its reliance on Section 3 of the Maharashtra Stamp Act which in no way mentions that an arbitration agreement/clause needs to be stamped. Therefore, it can be safely put that the Maharashtra Stamp Act in no way acts as a hindrance with respect to invoking the arbitration clause enshrined in a non-stamped contract as has been expressly mentioned in para 6.4 of the Global Mercantile judgment. Not only this the Apex Court has further iterated the significance of minimal to nil judicial intervention of the courts in the adjudication of the disputes stressing on the non – obstante clause of Section 5 of the Arbitration Act and further stresses on Section 16 of the said Act. The interpretation of these two sections, when read in its entirety clearly, manifests that all the commercial and civil matters can very much be successfully resolved by arbitration even the issue of whether a contract would be rendered as voidable due to non-stamping can be also successfully resolved by the means of arbitration. With regards to the second issue dealt in this case, the Apex Court has expressly mentioned that erstwhile judicial precedents with respect to the arbitrability of issues related to fraud have been construed in its extremely narrowest forms and further mentioned that all the judgments which have mentioned that issues related to fraud are not arbitrable are archaic and are based on a biased interpretation of the notion of public policy. It can be safely said that the decision laid down in the Global Mercantile judgment enables the parties to invoke the arbitration clause in an unstamped document, seek interim relief, and for the appointment of the arbitrator. The Apex Court in this judgment has taken a contemporary and holistic approach which pronounces this judgment which has indeed been a boon for the arbitration regime.

Concluding remarks

In a nutshell, it can therefore be summarised that the Apex Court has rightly placed its reliance on the English Case of Heyman v. Darwins,  wherein, Lord MacMillan establishing the essence of English Common Law in his opinion has rightly iterated 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.”

The Global Mercantile judgment has been a welcoming one upholding the essence of Section 16 of the Arbitration Act and dignifying the intent with which the draftsmen had drafted this Act. The sole intent of this Act is to safeguard the “Equitable Rights” of the parties and not forcing the parties to knock the doors of litigation or taking litigation as an alternative remedial mechanism which in no way will serve the true intent of the Arbitration Act and the parties will be forced to suffer the agony. The courts India through its precedents shall set examples and must encourage the parties to opt for arbitration as an alternative dispute resolution mechanism and not put so much stress on the technical compliances rather, the emphasis should be put on the larger picture which would serve to be beneficial for the parties. The Global Mercantile judgment has not only proved to be a landmark precedent on the national front but has also been of equal significance in the international arena. This precedent is definitely going to benefit an international business in accordance with the arbitration regime established in India. This judgment has further taken the onus to clear the air with respect to the disputes relating to the arbitrability of fraud in India and has resorted to a holistic interpretation while pronouncing the decision on this subject matter. This judgment has definitely set a new bar and has instilled a ray of hope among the parties rightly upholding the essence of the two landmark principles intertwined together being “Doctrine of Severability” and “Kompetenz Kompetenz.”

References


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